Market Wire: US Inflation Remains Tame, Raising Likelihood of September Rate Cut

Consumer price growth avoided a widely-feared acceleration in the United States last month, avoiding a widely-feared surge, and helping clear the way for a rate cut from the Federal Reserve as soon as September. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 0.197 percent in July from the prior month, accelerating slightly from June’s 0.287-percent increase, and rising 3.1 percent over the same period last year as services costs climbed. This was essentially in line with consensus estimates among economists polled by the major data providers ahead of the release. On a headline all-items basis, prices climbed 0.197 percent month-over-month, slowing down from the 0.287 percent pace set a month earlier, and were up 2.7 percent year-over-year.

Evidence of tariff-induced price pressures remained unclear, with auto-excluded core goods costs rising 0.22 percent from the prior month after jumping 0.55 percent in June. The bulk of the headline gain instead came from increases in the airfare, motor insurance, and medical care services categories.

Treasury yields are coming down on the policy-sensitive front end of the curve, equity futures are surging, and the dollar is retreating against its major rivals as traders move to price in more monetary easing from the Fed this autumn. Data out later in the week—including producer prices and retail sales numbers—could trigger a modest recalibration, but with July’s disappointing payrolls number in hand and inflation proving relatively tame, Chair Jerome Powell is seen turning more dovish in his opening comments at the Jackson Hole Economic Policy Symposium on the 21st, helping push swap-implied odds on a September rate cut toward the 90 percent mark.

A caveat is needed: the easing narrative could possibly lose steam in September when the next round of key jobs and inflation data is released. Although such a development wouldn't be our base case, an unexpected jump in employment and price growth could put the Fed back on hold, and upset current market calculations.

But investors could also begin struggling with trust issues. Less than two weeks after firing the agency’s previous head for reporting weaker-than-expected job growth in July and downwardly revising employment figures for May and June, President Trump yesterday said he would nominate economist E.J. Antoni—someone better known for misinterpreting economic statistics through a partisan lens than for academic rigour—as the new Bureau of Labor Statistics commissioner. “Our Economy is booming, he said, and “E.J. will ensure that the Numbers released are HONEST and ACCURATE”. We suspect traders will respond badly to any signs of political interference in the weeks ahead, and could begin downplaying the accuracy of official data prints as they seek out private-sector alternatives for a cleaner read on underlying economic conditions.

Please note: Our regular morning markets coverage will resume next week.