Inflation release stems market-wide optimism regarding future Fed decisions

U.S. inflation broadly cools

Last week, the Bureau of Labor Statistics released its highly anticipated Consumer Price Index (CPI) for June. CPI data signaled slowing inflation, with headline and core coming in at 3.00 and 3.30% respectively, both 0.10% below forecasts. Immediately following the Bureau’s release last Thursday, markets reacted as both the U.S. Dollar Index and Treasury yields fell, with the two-year falling 13 basis points. With Treasury yields down, there is an opportunity to proactively extend caps for maturities inside three months, ensuring protection as the Fed remains uncommitted to the timing and magnitude of a potential rate cut.

Additionally, the positive inflation results fueled an increase in market bets on rate cuts. Before the release, the market saw around a 70% chance of cuts in September, but post-release numbers jumped close to 90%. Although the report was encouraging for the Fed’s goal of reaching its dual mandate, Powell made it widely known that they are looking for consecutive good inflation releases before making a decision regarding the Federal funds rate.

Producer Prices Index (PPI) comes in hotter than expected

Last Friday, just one day after a soft CPI print, markets buzzed about potential rate cuts. However, PPI came in much hotter than expected. Core PPI, which measures the selling prices of goods and services sold by producers excluding food and energy, rose 3.00 % year-over-year. The data suggests that producers are still seeing the pressures of inflation, as the prices of the goods and services they provide continue to rise, which could later be passed down to consumers. Certainly, the Fed will weigh both the positive CPI print and the less encouraging PPI release during their next meeting in a few weeks.

Labor market

The labor market remained relatively strong over the first half of the year. Although unemployment spiked to 4.10% in June, it remains low compared to historical data. Job gains have been solid, averaging 248,000 per month for 2024, with revised May and initial June data both exceeding expectations.

The week ahead

Next week’s economic releases will highlight key “health-of-the-economy” indicators, with retail sales and initial jobless claims releasing July 16 and 18, respectively. Additionally, markets will assess the impacts of the assassination attempt on former U.S. President Donald Trump, as well as market commentary from Fed members regarding last week’s inflation release.