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Another sharp drop in the US price growth figures for June all but confirms a Fed rate cut in September, and likely another cut later this year as well.
In fact, if the initial market reaction is to be believed, there is now a non-negligible chance that the Fed cuts rate at each of the last three meetings in 2024. For now, we continue to look for the FOMC to ease policy at both the September and December meetings, but risks are building in favour of a faster cutting pace, with the prospect of more aggressive Fed easing is seeing the dollar slide – both GBPUSD and EURUSD are down 0.5% post-release.
Even so, we think that there is shrinking room for a further softening in the data to spur dollar weakness moving forwards. Any more downside inflation surprises from this point would look increasingly recessionary, and as such, would likely see an uplift for the greenback on a US haven bid.
Looking first at the headline prints from today’s release, aggregate prices actually fell by -0.1% in June, while core inflation rose by just 0.1% MoM, and 0.065% on an unrounded basis. On a YoY basis, that leaves US inflation running at 3.0%, with core prices growing only modestly faster 3.3%. Moreover, the supercore measure of inflation, closely watched by the Fed, fell by -0.05% MoM in June, almost identical to the -0.04% decline seen in May. This in turn saw the 3mma annualised measure of supercore drop from 4.19% to 1.34% last month, marking an alarming slowdown in US inflation momentum.
Perhaps most surprising though was the broad-based nature of the June inflation slowdown. This was a feature of the May undershoot too, but one that has now become much more pronounced. Granted, core goods inflation came in a little higher than expected at -0.18%, but this was still below the -0.04% reding from May. Core services meanwhile exhibited notable weakness, printing at 0.13% MoM, down from 0.22%.
This was despite the expectations of many analysts, including ourselves, that had expected a rebound as some seemingly one-off price drops from last month mean reverted.
While this was true of auto insurance prices which rose 0.92% in June against a prior reading of -0.12%, lodging and airfares both posted further falls, dropping by -2.0% and -5.0% respectively last month, indicating in both cases a faster rate of price decline than seen in May. Even the typically sticky shelter components saw a notable softening in June too. Owner’s equivalent of rent grew by just 0.38% while tenants rent rose 0.26%, with both landing below the 0.43% and 0.39% seen respectively in May.
All told, today’s news will likely be welcomed at the Fed. FOMC members had indicated that either the labour market needed to ease significantly, or that multiple more rounds of soft inflation data would be necessary before cutting rates. Today’s print is another reading that ticks that second box, an outcome that should favour Fed rate cuts in both September and December, in line with our base case.
Even so, we think today’s figures contain reason for caution, which could limit any immediate celebrations. Further weakness from this point would be hard to square with the kind of consumer resilience necessary for a soft landing. With this in mind, we will be keeping a close eye on growth indicators in the coming weeks, cognisant of growing risks that the current economic cooling could now be turning into something more sinister.
Core inflation eased once again in June, while underlying price growth momentum plunged to levels not seen since late 2021
Author:
Nick Rees, FX Market Analyst