Initial jobless claims jumped to the highest level since last summer, while the core producer prices were unchanged, lifting the odds for a Federal Reserve rate cut in September. The S&P 500 dipped in Thursday morning stock market action.
While new Fed projections on Wednesday signaled a likelihood of a single rate-cut this year, Wall Street took comfort in benign CPI data. Chair Jerome Powell said that a string of more data like the CPI could alter the Fed rate-cut picture, and benign PPI data provided a second serving of good news. On top of that, the first real sign of a softening of the labor market could lead to a more abrupt shift in Fed policy.
Jobless Claims
Initial claims for jobless benefits rose 13,000 to 242,000 in the week through June 8. That lifted the four-week average to 227,000 from 222,250.
Jobless claims haven't been this high since August 2023. The four-week average rose to the highest level since last September.
PPI Inflation
The overall producer price index for final demand fell 0.2% on the month, way below +0.1% forecasts. The PPI rose 2.2% from a year ago, undercutting 2.5% estimates.
The core PPI, excluding food and energy, was flat vs. April, below views for a 0.3% gain. The 2.3% 12-month inflation rate came in below 2.4% forecasts.
That follows May's 0.16% rise in the core CPI, the smallest monthly increase since August 2021. That could signal the renewal of a disinflationary trend. However, Powell made it clear that one inflation report isn't nearly enough to give the Fed the confidence it needs to start cutting rates.
Core PCE Price Index Components
The headline PPI largely measures prices that businesses charge each other, which may feed into consumer price inflation. However, some components of the PPI feed directly into the Fed's primary inflation measure, the core PCE price index.
Health care services is the most important, since it is the biggest component of core PCE price inflation. In May, prices for selected health care industries jumped 0.8%, unadjusted for seasonal factors. From a year ago, health care services prices rose 3.5% vs. April's 2.9% rise.
However, other components offered some good news. Airline passenger services prices fell 4.3% in May. That compares to the CPI report's 3.6% decline in airline fares.
Portfolio management services costs, which tend to rise with the S&P 500, slipped 1.8%.
Putting the PPI and CPI together, Morgan Stanley economists are now forecasting that core PCE prices will rise just 0.12% in May.
Fed Rate-Cut Odds
After the jobless claims and PPI data, markets were pricing in 68% odds of a rate cut by the Sept. 18 Fed meeting, up from around 62% before the data, according to the CME Group FedWatch tool. Before yesterday's CPI, odds stood around 50%.
Markets now see 69% odds of two quarter-point rate cuts this year.
S&P 500
The S&P 500 opened slightly higher but dipped 0.2% in late Thursday morning stock market action. On Wednesday, the S&P 500 rose 1%, finishing at a new record closing high for the 28th time this year.
The 10-year Treasury yield edged down 2 basis points to 4.28%.
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