After US inflation came in lower than expected, investment managers discuss the impact and the timing of a potential interest rate cut.
The US inflation rate fell to 3 per cent in June, beating
expectations forecast by economists of 3.1 per cent and falling
from 3.3 per cent in May, giving the US Federal Reserve the
all-clear sign to start lowering interest rates later this year.
This marks the third consecutive month of declines and it’s the
lowest inflation reading in 12 months for the US. Core inflation
marginally ticked lower to 3.3 per cent from 3.4 per cent the
previous month, sparking predictions for a September rate cut.
Much of this slowdown in inflation came from lower services
inflation with the core services, minus housing, (aka Supercore)
number coming in at -0.05 per cent which followed a -0.04 per
cent print last month.
Here are some reactions to the figures from investment
managers.
Tom Hopkins, senior portfolio manager at BRI Wealth
Management
“Today’s reading should bring further confidence to markets.
Inflation is on the way back to the 2 per cent target. Despite
not being quite there yet, the road is open to a rate cut in the
near term and we still expect the Federal Reserve to reduce a
restrictive federal funds policy rate by 25 basis points in
September.”
John Kerschner, head of US securitized products at Janus
Henderson Investors
“Given that the next Federal Reserve meeting is less than three
weeks away, the market is currently pricing in that the Federal
Reserve will skip that meeting and make their first cut in
September. Odds of a cut at that meeting are now close to
100 per cent, according to the market. Maybe more
importantly, the market is now expecting three cuts by the end of
January 2025. Chair Powell recently said that the risks
toward inflation are now more balanced. Today”s number
reinforces that view and perhaps now tilts the scale
toward concerns of a sharper slowdown in the US economy.”
Ryan Brandham, head of global capital markets, North
America at Validus Risk Management
“The US CPI came in slightly softer than expected. The market
will likely take this as support for a September rate cut, and
take equities higher and lower US yields. This is a reassuring
number for the Fed – the question is, is it reassuring enough to
give them comfort to lower rates in September? At the same
time, US Initial Jobless Claims were slightly stronger than
expected as the US labor market softens only at a gradual pace.
On its own, this would suggest caution against cutting rates in
September, but today it will most likely be overshadowed by the
CPI number.”
Josh Jamner, investment strategy analyst at ClearBridge
Investments
“With recent Fedspeak suggesting the Federal Open Market
Committee (FOMC) is coming to the view that the labor market is
in better balance, the committee is looking to gain confidence
that inflation is on a path to eventually return toward the 2 per
cent target, and today’s print combined with the May inflation
data should help put committee members minds at ease. The
read-through from the CPI release to the Fed’s preferred core
personal consumption expenditures (PCE) measure suggests that
core PCE should be around 0.2 per cent (or lower) this
month. While that could move higher or lower based on
tomorrow’s producer price index (PPI) release, something in the
0.2 per cent ballpark would be consistent with a September rate
cut in our view.
“Fears that slowing inflation is coinciding with consumer
weakness should be somewhat allayed by the rise in prices for
Food Away From Home (+0.4 per cent last month) which tends to be
a more discretionary category. Similarly, the drop in initial
jobless claims as well as continuing claims suggests that while
the labor market is normalizing, it isn’t seeing the type of
weakness that could spark recessionary worries. This data has
been noisier in the wake of the pandemic – particularly over the
summer – but suggests that a layoff cycle that could lead to a
recession is not currently building.”
Isabel Albarran, investment officer at Close Brothers
Asset Management
“This indicates a gradual easing in the US economy alongside
cooling labor market indicators. We anticipate the earliest
possibility of a rate cut from the Fed in September, with a
stronger likelihood in the fourth quarter. Recent FOMC minutes
reveal a division within the committee, with some members still
concerned about persistent inflation and others now fearing the
economy will cool too fast. Economic data certainly does seem to
be cooling. While the latest non-farm payroll figures showed a
slightly stronger headline print, downward revisions for previous
months and softer private payrolls point to deceleration. Coupled
with continued progress on inflation, this makes the case for
cuts.
“However, just as data is going more the Fed’s way, the upcoming
US Presidential Election may be a curveball. Trump’s return to
the White House looks increasingly likely, given mounting
pressure on Biden to withdraw. This makes the November Fed
meeting tricky – a second Trump term is likely to herald
increased fiscal spending and borrowing, which could push
inflation higher.”
Daniele Antonucci, chief investment officer at Quintet
Private Bank (parent of Brown Shipley)
“The US inflation downside surprise boosts the odds of a
September rate cut or, perhaps, in the fourth quarter of this
year. While it’s not a done deal, taken at face value these
figures suggest that the ‘sticky’ inflation prints during the
first half were due to special factors. This piece of data is
coming when the Fed is debating, meeting by meeting, when to cut
interest rates.
“We’ve long thought of this being a year of two halves. Slowing
growth and easing inflation in the first half, followed by
mid-year rate cuts and a gradual recovery in the second half of
the year. That’s just what happened in Europe, although growth
didn’t slow to the recessionary levels we initially envisioned.
We also spoke about an asynchronous interest rate-cutting cycle
in the West, with the Fed leading the way as inflation was
moderating more markedly in 2023. But US growth has been
surprisingly resilient (though beginning to slow more recently),
causing inflation to be slightly stickier than expected. The
asynchronous rate-cutting cycle has started, but it’s the
European Central Bank (ECB) leading the way, with the Fed lagging
and the Bank of England somewhere in the middle.”
Lindsay Rosner, head of multi-sector investing at Goldman
Sachs Asset Management
“One word: pivotal. With three inflation prints between this
morning and September’s Fed meeting, today’s print was crucial in
helping the Fed gain confidence that inflation is still moving in
the right direction. The economic data heatwave seems to have
subsided as we are getting cooler inflation data on the heels of
cooler labor market prints last week. Cooler temperatures
forecast a Fed cut in September.”
Andrew Summers, chief investment officer at Omnis
Investments
“Core Inflation continues to trend lower, and surprised consensus
forecasts on the downside. This data coupled with the softer
labor market data should be enough to get the FOMC over the line
and begin their cutting cycle. Chair Powell’s testimony to
Congress noted that “elevated inflation is not the only risk we
face” and his language on the labor market was incrementally
dovish relative to the June FOMC minutes. However, given that the
FOMC clearly doesn’t want to be seen to be moving too
pre-emptively, there is unlikely to be action at the July meeting
but a stronger signal of intent given before cutting in
September, following two more rounds of data. In our view, there
is a significant risk that the current pricing of cuts in 2024
are insufficient.”
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