U.S. Consumer Prices See First Decline

Consumer prices fell 0.1% in June, marking the first decline in four years as inflationary pressures ease.

Why it matters: The drop in consumer prices offers relief to Americans who have been grappling with rising living costs and suggests that underlying inflation is being tamed.

The details:

• The consumer price index (CPI) increased 3.0% year-on-year.
• Core CPI, which excludes volatile food and energy prices, rose 0.1% for the month and 3.3% over the past year.
• Weekly jobless claims fell by 17,000 to 222,000, while continuing claims decreased by 4,000 to 1.852 million.
• The moderation in prices is reflected across various sectors, signaling the potential for more stable economic conditions.

Tech stocks are sliding ahead of key earnings reports from Microsoft, Meta Platforms, Apple, and Amazon.com.

Why it matters: Investors are closely watching the performance of Big Tech companies, as their earnings reports could significantly impact the broader market.

The details:

• The Nasdaq was down 1.1% after opening higher, while the S&P 500 fell 0.6%.
• Among the Magnificent Seven group of megacap technology stocks, Nvidia was the biggest laggard with a drop of 5.2%.
• Reports from Alphabet and Tesla may have lowered the bar for Big Tech, according to Sevens Report Research’s Tom Essaye.
• Investors are in a “show me” mode, wanting to see better earnings before jumping back into tech stocks.

A September Fed rate cut looks likely, with markets assigning a near-100% probability based on CME FedWatch data.

Why it matters: The Federal Reserve’s decision to cut interest rates could have significant implications for the economy and financial markets.

The details:

• The Fed kept the federal-funds rate target range unchanged at 5.25%-5.50% during its July meeting.
• The Fed’s official statement included new language indicating attentiveness to both sides of its dual mandate, suggesting a rate cut in September is very likely.
• Market expectations hinge on the continuation of relatively benign inflation data.
• FOMC projections from June indicated one rate cut by the end of 2024, assuming core PCE inflation rates meet or fall slightly below 2.8%.

What’s next: Markets predict three cuts in 2024, potentially decreasing the federal-funds rate to 4.50%-4.75% by December, and a further four cuts in 2025, lowering the rate to 3.50%-3.75% by year-end.

Full story

U.S. consumer prices fell 0.1% in June, marking the first decline in four years and signaling that inflationary pressures may be easing. The consumer price index (CPI) still rose 3.0% year-on-year, but the core CPI, which excludes food and energy prices, only increased 0.1% for the month and 3.3% over the past year. The labor market also showed improvement, with weekly jobless claims falling by 17,000 to 222,000 and continuing claims decreasing by 4,000 to 1.852 million.

The moderation in prices is seen across various sectors, indicating the potential for more stable economic conditions in the future. “The figures suggest that underlying inflation is being tamed,” said Lucia Mutikani, a Reuters reporter covering the story. The Federal Reserve kept interest rates unchanged at its July meeting, but a rate cut in September seems likely if favorable inflation data continues.

The FOMC’s official statement included new language indicating attentiveness to both sides of its dual mandate, suggesting a shift in focus.

Consumer prices mark first fall

Markets now assign a near-100% probability of a rate cut in September, according to CME FedWatch.

The expectation hinges on the continuation of relatively benign inflation data. FOMC projections from June indicated one rate cut by the end of 2024, assuming core PCE inflation rates meet or fall slightly below 2.8%. Current projections estimate core PCE inflation at 2.7%.

However, with the labor market weakening quicker than anticipated and unemployment already at 4.1% as of June, more than one rate cut may be needed, likely starting in September. Markets predict three cuts in 2024, potentially decreasing the federal-funds rate to 4.50%-4.75% by December, and a further four cuts in 2025, lowering the rate to 3.50%-3.75% by year-end. “Ultimately, we expect the federal-funds rate target range to drop to 1.75%-2.00% by the end of 2026, driven by lower-than-target inflation and slightly elevated unemployment,” said Preston Caldwell, senior U.S. economist at Morningstar Research Services LLC.