Today's consumer price index report could be the moment investors have been waiting for all year. The Federal Reserve has appeared to be on the threshold of cutting rates since January. Yet one more soothing inflation report could kick the door wide-open — to two or more rate cuts this year. The S&P 500 is on a roll ahead of the CPI, extend its winning streak to seven sessions on Wednesday.
CPI Forecasts
Economists expect a 0.1% overall CPI increase on the month, with a 0.2% rise in the core CPI, which strips out food and energy.
But it could go either way. Deutsche Bank expects a 0.25% rise in the core CPI as May's decline in transportation services prices could lead to a rebound in June. However, Nomura predicts a tame 0.135% core CPI increase, thanks to lower prices for hotel and motel stays, as well as lower airfares.
Keep in mind, though, that the Fed's primary inflation measure, the core PCE price index, often grows more slowly than the core CPI. That happened in May, when the core CPI rose 0.16%, while the core PCE price index edged up just 0.08% — the smallest increase since November 2020.
One big reason for the disparity is that housing costs, which have continued to outpace core inflation as a whole, account for 43% of the core CPI basket but less than 18% of core PCE outlays.
CPI data provides about 70% of PCE price index components, with the rest coming from the producer price index, including prices for health care. PPI data out Friday at 8:30 a.m. will allow economists to sharpen their estimates for June's core PCE price index, which will be released on July 26.
Fed Chair Powell Turns More Dovish
Federal Reserve Chairman Jerome Powell told the Senate banking panel on Tuesday that the labor market "appears to be fully back in balance," lowering the bar for interest-rate cuts.
Powell's opening remarks characterized the labor market as still being "strong," but no longer overheated. That status-quo description was something of a letdown after Friday's soft June jobs report. But Powell shifted tone in his back-and-forth with lawmakers.
Powell has said for some time that the labor market has cooled. But this time he said it "has cooled really significantly across so many measures."
Since late 2022, Powell has emphasized inflation in nonhousing services as a key to the interest-rate outlook, because wages make up a high percentage of costs for service businesses from health care to haircuts to hospitality. But Powell said on Tuesday that the labor market is "not a source of broad inflationary pressures for the economy now."
That followed Powell's dovish declaration at a European Central Bank forum last week: "We are getting back on a disinflationary path," while adding that more good inflation data is needed.
Fed Rate-Cut Outlook Ahead Of CPI
Powell's encouraging inflation take last week came before the soft June jobs data provided further evidence that inflation pressures are easing.
Powell has said that unwarranted weakening of the labor market would create more urgency to lower the Fed's key interest rate from restrictive levels. His assessment that the labor market is still "strong" makes clear that we're not there. Yet his view that the labor market is fully balanced between supply of and demand for workers suggests that any further cooling of the labor market could hasten Fed rate-cutting.
As of Wednesday morning, markets are pricing in 75% odds of a Fed rate cut at the Sept. 18 meeting and 74% odds of two quarter-point rate cuts before the end of 2024, according to the CME FedWatch Tool.
However, any further tame inflation news or incremental cooling of the job market could turn expectations of one or two Fed rate cuts this year into an outlook for two or three, with an outside shot of even more.
S&P 500
The S&P 500 rose 1% in Wednesday stock market action, the biggest gain of its seven-session streak. The S&P 500, which notched its 37th record high this year has climbed 18.1% in 2024.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
