Kelly Evans: The cuts are coming
Kelly Evans, CNBC
Scott Mlyn | CNBC
The biggest news of the morning? Seeing the June CPI print with a negative sign. You can be pretty sure now that Fed rate cuts are coming.
The overall June consumer price index dropped 0.1 points from May. Year-on-year, it almost printed with a 2-handle (it came in at a flat 3.0%). The core was only up one-tenth on the month, and 3.3% on the year. And yes, the yearly numbers are still high. But the recent trend has been incredibly soft. Core CPI for the past three months annualized is now running just 1.1%.
How is this possible? As we’ve been compiling, we’re actually seeing downward price pressure in a number of different areas. Potato chips. Certain beauty products. Ecommerce broadly. In fact, core goods prices have dropped 12 out of the past 13 months in the CPI. Now services inflation is slowing, too. Even housing is finally losing some steam. Shelter rose just 0.2 points last month, about half the recent pace. “Housing disinflation is finally upon us!” said Julia Coronado.
The bond market knew exactly what to make of this. The 10-year Treasury yield dropped to 4.18%, furthering its roughly half-point drop since late April. J.P. Morgan changed its call for the Fed’s first cut to September from November. “Chair Powell does not want to be late to cutting rates,” former Goldman Sachs and Trump official Gary Cohn told CNBC after the release. “Especially after we all accused him of being late to raise rates.”
Given that the July meeting is in just a couple of weeks’ time, September now looks like the most likely timing for the first cut. Stocks initially spiked higher after the CPI release, which–importantly–came at the same time we got good news on new jobless claims, which fell last week. Although stocks have reversed somewhat, the Nasdaq especially, with 2-3% declines across the “Magnificent 7.”
The bulls will hope it’s a sign the market is finally broadening out, after registering its narrowest leadership since the dotcom peak in March 2000, according to Bespoke. Perhaps tech can take a backseat now to other sectors that can benefit from the “goldilocks” scenario this morning’s data paints, of a growing economy with low inflation.
Just look at the banks, posting 3-4% gains and among the strongest sectors today in anticipation of falling rates, which would lower their cost of deposits. The XHB homebuilder (and products) ETF is up almost 6%! We could actually be at a pretty nice economic inflection point right now–but only if the labor market doesn’t keep slowing.
See you at 1 p.m!
Kelly
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