Evelyn Reynolds

Markets now firmly expect a September interest rate cut in the U.S., pricing in a 90% likelihood.
However, some risks cast a cloud over this rate-cut outlook, Carl Weinberg, chief economist at High Frequency Economics, told CNBC.
“Why would we want to tinker with what we have right now? Why would you want to cut rates under those circumstances?” Weinberg sad.

Jerome Powell, chairman of the US Federal Reserve, during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, US, on Tuesday, July 9, 2024.
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Markets now firmly expect a September interest rate cut in the U.S., but the Federal Reserve has a strong reason to hold off, according to economist Carl Weinberg.
Money market pricing for a rate cut at the Fed’s fall meeting rose from around 70% to more than 90% on Thursday, according to LSEG data, after a softer-than-expected consumer price index print.

Fed Chair Jerome Powell had already bolstered expectations of such a move when he said earlier this week that there were risks in keeping interest rates too high for too long — comments interpreted as “modestly dovish” by analysts.
However, there are also risks to easing monetary policy that cast a cloud over the rate-cut outlook, Weinberg, chief economist at High Frequency Economics, told CNBC’s “Squawk Box Europe” on Friday.
“The Fed chair was very clear in his testimony this week … that inflation metrics and the economy in general are moving in the way that we kind of like,” Weinberg said.

That includes unemployment at around 4%, inflation moving toward 2% and the economy growing “roughly” at potential, he said.
“But [Powell] also implied, well, why would we want to change anything if the economy is at full employment, with inflation where we want it to be, and it’s growing nicely? Why would we want to tinker with what we have right now? Why would you want to cut rates under those circumstances?” Weinberg continued.

“There certainly is noise, buzz and data to support a rate cut at [the September] meeting. But there also is a cloud hanging over that decision.”
While a fall cut might look likely now, a lot can change between now and the Fed meeting on Sept. 18, Weinberg added.

Two more CPI prints are due before that date. The Fed next meets at the end of July, when markets have priced in only a 5% chance of a rate reduction.
Although U.S. inflation peaked lower than many other major economies over the last three years, it has also been slower to fall, leaving the Fed behind on the path of monetary easing.
The central banks of the euro zone, Switzerland, Sweden and Canada have all cut rates already this year, while the Bank of England’s August decision is seen on a knife edge. More

The producer price index is now up 2.6% year over year.
In June, an increase in the price for services offset a decline for goods.
The reading is an increase from the May number, which was also revised higher.

Cargo containers sit stacked on ships at the Port of Los Angeles, the nation’s busiest container port, in San Pedro, California, on Oct. 15, 2021.
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A measure of wholesale prices rose more than expected in June as Wall Street assesses when the Federal Reserve will feel comfortable cutting interest rates.
The producer price index rose 0.2% last month, the Labor Department’s Bureau of Labor Statistics reported on Friday. Economists surveyed by Dow Jones were expecting a 0.1% increase for the index. PPI is now up 2.6% over the past year.

The PPI is a gauge of prices that producers can get for their goods and services in the open market. In June, an increase in the price for services offset a decline for goods.
The reading is an increase from the May number, which was also revised higher. Friday’s report said that the index was unchanged in May as compared to a decline of 0.2% in the original release.
The hotter-than-expected PPI reading runs counter to recent data that shows inflation declining, though economists and investors tend to put more weight on the consumer-focused inflation readings.
Friday’s report comes shortly after the June consumer price index came in cooler than expected on Thursday. The CPI actually showed that headline inflation declined on a monthly basis and now sits at 3% year over year.
The central bank’s next policy meeting is at the end of July, where it is widely expected to hold rates steady. Traders have increasingly dialed in on the September meeting as the likely time for the first rate cut.
The Fed’s preferred inflation reading is the personal consumption expenditure price index. The June PCE data is slated for release on July 26. More

The monthly inflation rate dipped in June, providing further cover for the Federal Reserve to start lowering interest rates later this year.
The consumer price index, a broad measure of costs for goods and services across the U.S. economy, declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years, the Labor Department reported Thursday. The all-items index rate fell from 3.3% in May, when it was flat on a monthly basis.

Excluding volatile food and energy costs, so-called core CPI increased 0.1 % monthly and 3.3% from a year ago, compared to respective forecasts for 0.2% and 3.4%, according to the report from the Bureau of Labor Statistics.
The annual increase for the core rate was the smallest since April 2021.
A 3.8% slide in gasoline prices held back inflation for the month, offsetting 0.2% increases in both food prices and shelter. Housing-related costs have been one of the most stubborn components of inflation and make up about one-third of the weighting in the CPI, so a pullback in the rate of increase is another positive sign.

Stock market futures rose following the release while Treasury yields tumbled.
In addition to the pullback in energy prices and the modest increase for shelter, used vehicle prices decreased 1.5% on the month and were down 10.1% from a year ago. The item was one of the main drivers in the initial surge in inflation back in 2021.
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The U.K. economy grew by 0.4% in May, flash figures published by the Office for National Statistics showed on Thursday.
The British pound jumping to a four-month high against the U.S. dollar after the announcement.
The broad-based recovery will be welcomed by the newly-elected Labour Party, as Prime Minister Keir Starmer undertakes his first week on the job.

City of London skyline on 10th June 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government district that contains the primary central business district CBD of London. The City of London is widely referred to simply as the City is also colloquially known as the Square Mile.
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LONDON — The U.K. economy grew by 0.4% in May, flash figures published by the Office for National Statistics showed on Thursday, with the British pound jumping to a four-month high against the U.S. dollar after the announcement.
Gross domestic product came in above the 0.2% monthly expansion forecast by a Reuters poll of economists.

The British economy exited a shallow recession in the first quarter of the year, then flatlined in April.
The nation’s dominant services sector showed continued growth of 0.3% in May, as output in both production and construction rebounded from losses, rising by 0.2% and 1.9%, respectively.
Sterling was 0.14% higher against the U.S. dollar at $1.2863 by 8:30 a.m. in London — the highest level for the British currency since March 8, 2024, according to LSEG data.
The broad-based recovery will be welcomed by the newly-elected Labour Party, as Prime Minister Keir Starmer undertakes his first week on the job.
Goldman Sachs last week upgraded its growth forecast for the U.K. following left-of-center Labour’s thumping victory in the country’s general election. The party campaigned on a platform that centered on boosting economic growth, housing and planning.

The party’s large parliamentary majority and business-friendly messaging have led analysts to describe the government as generally supportive of U.K. assets.
In a note, Ashley Webb, U.K. economist at Capital Economics, underlined the recent trend of British GDP increases in recent months — barring the lack of growth in April — “which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade.”
Price rises in the U.K. have cooled from a 41-year high of 11.1% in October 2022, all the way down to the Bank of England’s 2% target in May this year. The performance has raised expectations for a coming interest rate cut from the Bank of England.
However, the BOE continued to strike a cautious tone at its June meeting even after its peers at the European Central Bank began their own path of interest rate cuts, warning that key indicators of inflation persistence in the U.K. “remained elevated.” Markets remain roughly evenly split on the prospect of a cut at its August meeting.

Labour agenda

It will now be up to the new government to build momentum behind the latest economic growth figures, Muniya Barua, deputy chief executive at industry campaign group BusinessLDN, said in emailed comments.
“With the public finances stretched, ministers should follow its flurry of recent pro-growth announcements by prioritising high-impact, low-cost measures which taken together could help unlock much-needed private investment,” Barua said, citing an overhaul of the apprenticeship system and scrapping stamp duty on share transactions.
New Finance Minister Rachel Reeves last week said Labour would introduce mandatory house-building targets, lift the ban on new onshore wind farms in England and reform planning rules. On Wednesday she announced the launch of a £7.3 billion ($9.4 billion) national wealth fund targeted at attracting private sector investment in U.K. infrastructure projects.
The business community now awaits Labour’s first fiscal statement, which is expected no earlier than mid-September, Lindsay James, investment strategist at Quilter Investors, said in a note.
This “should make both taxation and spending plans clearer. This will allow businesses to better plan ahead and could in turn reinvigorate their want to invest,” James said.
“However, this would take time to feed through, and until there is a better understanding of what is to come, we are unlikely to see any meaningful acceleration in GDP growth,” she added. More

Economists surveyed by Dow Jones are looking for CPI to rise 0.1% from May, and 3.1% from the same month a year before.
Thursday’s report comes after Federal Reserve Chair Jerome Powell delivered two days of testimony on Capitol Hill this week.
Shelter and medical care services could be key areas to watch, according to one chief investment officer.

An Aldi supermarket in Alhambra, California, on June 27, 2024.
Eric Thayer | Bloomberg | Getty Images

A widely anticipated inflation report on Thursday may solidify expectations for the Federal Reserve to cut interest rates in coming months.
The consumer price index, or CPI, report for June is due out at 8:30 a.m. ET. Recent economic releases have suggested that inflation and economic growth are both cooling, including last week’s report that unemployment in June ticked up to 4.1%.

Thursday’s report comes after Federal Reserve Chair Jerome Powell delivered two days of testimony on Capitol Hill this week. The central bank chief did not indicate when exactly rate cuts will begin. However, Powell did say the Fed sees the risks to the economy as more in balance between inflation and recession and that the central did not need to wait until inflation hit the 2% level to cut rates.

What to watch for

Economists surveyed by Dow Jones are looking for CPI to rise 0.1% month over month, and 3.1% year over year. The core CPI, which strips out more volatile food and energy prices, is expected to rise 0.2% from May and 3.4% since June last year.
In May, CPI was unchanged month over month and up 3.3% on an annual basis.
Focusing on the trends of unemployment and inflation could bolster the case for rate cuts, said Matt Brenner, managing vice president, investments and product management at MissionSquare Retirement.
“The level on inflation is still elevated relative to the Fed’s [2%] target. The level on unemployment is still very low historically at 4.1%. But the trend in both is that unemployment is gradually starting to pick up and that inflation continues its downward trajectory,” said Brenner.

“For some time the Fed has been more focused on levels, and now it seems that they may be starting to tilt more towards a focus on trend. And if that’s the case, then the chances of a rate cut go up,” Brenner added.
The price changes in the components that make up the CPI index will also be a focus on Thursday, especially if the number comes in different from expectations. Shelter and medical care services could be key areas to watch, said Wilmington Trust Chief Investment Officer Tony Roth.
Both shelter and medical services are also key parts of the personal consumption expenditures index, the Fed’s preferred inflation measure, rather than CPI.
“We’ve seen medical services [be] pretty tame, and that’s important because medical services makes up a much bigger portion of the PCE, which is the more important of the two inflation prints,” Roth said.

Market effect

The CPI report comes as markets are on the upswing.
Stocks and bonds have both rallied in July as traders grow more confident in a rate cut sometime this year. The S&P 500 crossed 5,600 for the first time on Wednesday.

Stock chart icon

The stock market has rallied in July, with the S&P 500 hitting another record high on Wednesday.

Fed funds futures pricing shows traders are expecting the Fed to hold rates steady at its meeting later this month, and then cut in September, according to the CME FedWatch Tool. A month ago, the chances of another pause in September were close to a toss-up, according to the same tool, which uses 30-day fed funds futures to come up with implied probabilities.
The expected hold in July could keep Thursday’s CPI report from being a big market mover, Bank of America rates strategist Meghan Swiber said in a note to clients Wednesday.
“Cooling activity and limitations on near-term cut pricing should confine market response in either direction,” Swiber said.
However, Wilmington Trust’s Roth said stocks could rally if the inflation reading is cooler than expected because some investors have not shaken their fears from earlier this year, when inflation briefly ran hotter.
“I don’t think that the market has fully appreciated the weakness in the economy, or the fact that inflation is clearly in the rear view mirror,” Roth said.
— CNBC’s Michael Bloom contributed reporting.

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