Notes From the Desk – US June CPI – Break Out the Punch Bowl
Let’s get the party started! Today’s weaker-than-expected June CPI data should give the Federal Reserve (Fed) the confidence to begin cutting rates later this year.
By the numbers:
- YoY Headline inflation 3% (3.1% expected)
- YoY Core inflation 3.3% (3.4%)
The implications:
The report was unambiguously favourable.
- Energy prices fell.
- Food prices were flat.
- Core services ex-housing (i.e., ‘super-core’ ) fell, led by travel and lodging.
- Core goods fell.
- Shelter prices increased, but the pace slowed.
Today’s inflation numbers and a rising unemployment rate open the door for a September rate cut. The Fed could use the July meeting to prepare markets for that possibility. US yields are lower by 10-12 bps as investors price in two cuts this year.
The excitement has spilled over to Canada. Domestic yields have fallen 7-8bps, as two more cuts from the Bank of Canada appear more likely.
