Soft US inflation data is likely the green light the Fed has been looking for to start lowering rates, with markets pricing the first cut for the September meeting. More confidence that a Fed easing cycle is nearing played out through lower Treasury yields, led by the front end of the curve as the 2-year tenor declined 15bps this week compared to a 10bps fall for the 10-year. In FX, this dynamic led to a weaker US dollar, notably so against the Yen where markets sense the BoJ and MoF swung into action with another intervention post the US CPI report. Although the major US equity indices saw modest gains, a rotation from growth to value drove small caps to a 6% rally for the week. Some of the highlights on next week's calendar include a speech from Fed Chair Powell, UK CPI data, ECB policy meeting and employment data in Australia.
After almost a year of peak interest rates in the US, the data flow is closing in on providing the Fed with the 'increased confidence' it requires to start loosening restrictive monetary policy. Markets now fully discount 2 rate cuts in the US by year-end, with the prospect of a third cut in play. This is in response to June's soft nonfarm payrolls report, while this week's key CPI report came in weaker than expected - with markets effectively ignoring an upside surprise in producer prices (0.2%m/m, 2.6%yr). Additionally, Fed Chair Powell appearing at his parliamentary testimony noted that with inflation having slowed significantly and the labour market cooling, there was a risk that the FOMC could 'unduly weaken' the economy and employment if it moved too late in dialing back restrictive monetary policy.
A 0.1% decline in headline CPI for June (vs 0.1% expected) saw the annual pace slow from 3.3% to 3% (vs 3.1%), while the core rate came in at 0.1%m/m (vs 0.2%) and 3.3% over the year (vs 3.4%), down from 3.4% previously. These outcomes followed an encouraging report in May, the trend indicating price pressures have eased materially since increasing earlier in the year. Accordingly, the 3-month annualised rates have slowed to 1.1% headline and 2.1% core to be at lows to June 2020 and March 2021 respectively. The composition of goods disinflation (-0.3%yr) combined with elevated services inflation (5%yr) remains, but the latter is starting to show signs of abating. Notably, shelter costs saw their slowest month-on-month rise (0.2%) since August 2021 and the annual pace (5.1%) has eased to a 26-month low.
In the UK, an upbeat print for monthly GDP of 0.4% in May (vs 0.2%) and relatively hawkish commentary from BoE officials has moderated expectations for an August rate cut. Although hesitation around easing policy was not unexpected from hawkish BoE members Haskel and Mann, markets reacted to a speech from BoE Chief Economist Pill - considered a closer guide of the consensus view of the Monetary Policy Committee - that mentioned that upside risks to inflation via services prices and the labour market were still present. Next week's CPI data (June) will be key to resetting expectations around the timeline for the BoE to start cutting rates.
Turning to Australia, consumer sentiment on the Westpac-Melbourne Institute Index declined in July (-1.1%) and remains at a very weak level (82.7) that has changed little over the past couple of years. A key finding in the report dampening sentiment was an increased expectation for further rises in mortgage rates. The NAB Business Survey reported a softening in business conditions to a below-average level (+4) as all of the major subcomponents (trading, profitability and employment) slowed; however, business confidence surprisingly improved to its highest level since early 2023. Meanwhile, housing finance slowed in May falling by 1.7% (see here); however, that is in the context of a sharp acceleration where monthly commitments ($28.8bn) have surged almost 24% from the cycle low early last year.