Inflation release stems market-wide optimism regarding future Fed decisions
Summary
On Wednesday, July 10, Fed Chair Jerome Powell submitted remarks to the Monetary Policy Committee (MPC) on Financial Services and the U.S. House of Representatives as part of the Fed’s Semiannual Monetary Policy Report. Powell said, “We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation.” His remarks are important to keep in mind, especially after last week’s inflation release.
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.
Source: Bureau of Labor Statistics
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.
Subscribe to receive our market insights and webinar invites
About the author
-
Amol Dhargalkar
Managing Partner, Chairman
Kennett Square
Amol Dhargalkar is a Managing Partner and Chairman for Chatham’s Board of Directors. He brings over 20 years of experience in derivatives capital markets expertise.
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
24-0100
