Instant View: US June CPI a welcome disinflation signal for Fed

NEW YORK (Reuters) – U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside, but probably not fast enough to discourage the Federal Reserve from resuming raising interest rates later this month.

The Consumer Price Index gained 0.2% last month after edging up 0.1% in May, the Labor Department said on Wednesday. The CPI was lifted by rises in gasoline prices as well as rents, which offset a decrease in the price of used motor vehicles.

Over 12 months, the CPI advanced 3.0%, the smallest year-on-year increase since March 2021 and followed a 4.0% rise in May.

Economists polled by Reuters had forecast the CPI rising 0.3% last month and climbing 3.1% year-on-year.

MARKET REACTION:

STOCKS: U.S. stock index futures extended gains and were last up 0.61%, pointing to a firm open on Wall Street BONDS: U.S. Treasury yields fell, with 2-year note last at 4.793%, and the 10-year note at 3.93%FOREX: The euro extended to a 0.38% gain against the U.S. dollar, while the was off 0.34%

COMMENTS:

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA

    “Obviously this has pleased markets, but the question is, is July 26 the one and done? The Fed is inching closer and closer toward its terminal rate… The market is sensing the Fed getting closer and closer to that final one and done, but it’s probably not July 26. Equity market futures inched higher and 10-year Treasury yields have been coming down a bit.”

JOSEPH LAVORGNA, CHIEF U.S. ECONOMIST, SMBC NIKKO SECURITIES AMERICA INC, NEW YORK

“The headline inflation has been moderating very rapidly as history suggests. June certainly is finally showing some loosening, which is consistent with some of these other metrics that are seen in the PPI as well as the ISM services price components, which do show inflation moderation.

“The interesting point about the June core reading is that it rounded up  to 0.2% rather rounding down to 0.2%, so it was definitely a softer-than-expected number.

“We’re seeing moderation in vehicle prices, both new and used. That’s important. They were a big contributor going higher and given what the Manheim data are showing, we’re probably going to lose another 10th on the core the next couple of months, just from this deflation that’s finally coming in.

“On the car side, you’re seeing a little bit of the weakness and rents not so much, but given anecdotes of weaker pricing across the country, that will eventually move lower. When that happens, you could start to see some core readings that perhaps are even lower than 0.2%.

“The Fed doesn’t have its mission accomplished yet, but certainly we’re moving in the right direction.”

PHIL BLANCATO, CHIEF EXECUTIVE OFFICER, LADENBURG THALMANN ASSET MANAGEMENT, NEW YORK

“The good news is the expectations that the Federal Reserve is only going to hike one or two more times.”

  “This is going to be a boost for the market that the end of the rate hiking cycle is coming. We’re not yet at the Fed’s mandate and core data suggests that we still have more room to go.”

“But at the same time, we’re on the right path, so the slow grind lower is happening, and in fact the number surprised to the downside that we actually beat expectations.”

ART HOGAN, CHIEF MARKET STRATEGIST, B RILEY WEALTH, NEW YORK

   “The CPI report has come in lighter than expected both on the headline and on the core and the markets are reacting in a positive fashion to that report.”

    “Its policy implications are clear that the Fed is at or near the end of this rate hike cycle.”

“Even if they raise rates at the end of this month, that may likely be the last time.”

    “Clearly inflation is heading in the right direction, and this is showing that they’ve made significant progress in their battle to tamp it down.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN“The Fed may have talked itself into a corner with a July 26th rate hike. The data don’t confirm that they need to actually hike. Since they’re stubborn, they’ll probably do it anyways. Thankfully the market has been expecting that hike. The end is near for hikes.”

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA

  “It is very clear that the back of inflation is broken and it’s now showing up in the data and markets are starting to get come around to the conclusion that the rate hikes are behind us.”

  “The Fed will hold but continue to use the forward guidance to remind the markets that at any moment if inflation data turn back the other direction that they will indeed begin cycling through rate hikes again.”

  “You have inflation data and also economic activity data in manufacturing that clearly show that the transitory effects of supply chain have rolled over. You have clear indications that manufacturing is, if it isn’t in recession, it’s close.  So that particular portion of the inflation equation is very, very positive and already where it needs to be. 

  “The services inflation has been sticky. But two of the pieces of that inflation calculations one of which is owners equivalent rent, is starting to see cracks, and that particular component is going to subtract from services inflation throughout the next year.”

  “That’s one of the reasons markets are so happy to see the inflation data roll over because the one of the primary components, rent, is one of the places where it had been stubbornly high.”

  “But one of the things that will happen in probably is the market is now going to wonder how long it will be before the inflation data show really significant accelerating declines in inflation and whether the Fed has to adapt and pivot and start doing rate cuts.”

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