U.S. inflation slows. Is a rate cut in the cards?

2024-06-14

BeiChen Lin, CFA, CPA

BeiChen Lin, CFA, CPA

Director, Head of Canadian Strategy




Economic insights Market insights
hi thank you for tuning in to russle Investments Market weekend review for the week ending June 14th 2024 I'm your host McKenna painter joining us today with sharp insights into the latest economic Trends our one and only investment strategist benen ly it's great to have you dialed in here today benen great to see you as well McKenna all right let's dive in what are our latest views on US inflation in the key takeaways from the Federal Reserve meeting sure thing McKenna it certainly seemed like the two fairy decided to pay investors a visit this week so we had a couple of important data points on inflation and these data points all showed a picture of inflation coming in softer than consensus expectations so the first data point we got this week was on Wednesday which was the core Consumer Price Index or core CPI inflation and analysts were looking for core inflation to come in at around 0. 3% month over B or 3.6% year-over-year instead it came in at 0.2% month over month or 3.4% year-over-year and when we look at the producer price index which is another measure of inflation faced by producers so think companies that inflationary measure on a core basis came in flat month over month and so this is good news because remember what the fed and a lot of other central banks have been trying to do is to get inflation back down towards its Target Target and earlier this year in the first quarter there was a bit of a slight setback but this week the core inflation data that was released both on the consumer side and on the producer side points to an encouraging sign that we are once again headed down the right track in terms of inflation being on a path down towards Target now the Federal Reserve this week still decided to leave interest rates unchanged at their meeting because ultimately they want more confidence they want to be extra confident before they start cutting their interest rates but we think based on how the data has been evolving thus far we think that the Federal Reserve will likely be in a position to be able to make their first interest rate cut in September of this year fascinating well fingers crossed interest rates can start coming down soon okay looking globally now what are the watch points for central banks outside of the US sure thing so in terms of develop Market Central Bank a lot of countries have been facing this challenge where central banks have had to raise interest rates significantly in order to bring inflation back down towards Target and we are seeing trends that outside of the us as well inflation rates in many countries have come down significantly from their Peak and so that is why we think that many central banks will be in a position to cut interest rates this year we already saw the ECB and the Bank of Canada earlier make their first cut and we think that some of the other developed Market central banks like for example the bank of England will also be in a position to make its first cut later this year now the bank of England actually has a meeting coming up next week but the thing is they had a little bit of a setback in their inflation numbers last month and even though they're going to get their latest inflation print next week before their meeting the market seems to think that it's probably not going to be enough to have them to start cutting rates immediately but if the inflation data comes in in line or softer than consensus expectations then it will make them pretty much on track to potentially lower interest rates at their subsequent meeting in August of this year so all in all we are in a situation where globally many central banks will hopefully be able to normalize interest rates bring down the cost of capital and that would be a welcome sign for a lot of investors worldwide all right sounds like we're all going to be waiting this summer for some answers China they recently released their inflation data what is it telling us about their economy right now sure but canot so the latest Chinese inflation data shows that price pressures in China are still relatively subdued prices were basically around flat month over month or slightly declining month over month and what that tells us is that there are some ongoing questions about economic growth prospects in China but overall we think that the government in China is still very much committed to achieving that growth Target that they have set of around 5% for 2024 and we think in order for them to do that they will need to continue to roll out new stimulus measures throughout the course of this year we've seen the Chinese government step up the amount of stimulus that they've been doing we think they still need to do more but the fact that price pressures remain relatively muted for now means that they have the room to be able to do those stimulus measures so we are cly optimistic that they should still be able to hit that around 5% growth Target for this year wow a lot to soak in especially about inflation unfortunately folks that's all the time we have today until next time stay informed and invest wisely we'll see you next week hi I'm Sophie an head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

  • U.S. consumer price gains eased during May
  • The Bank of England could start cutting rates in August
  • Inflation remains subdued in China

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and Product Operations Analyst McKenna Painter discussed the latest U.S. inflation data and how it could impact U.S. Federal Reserve (Fed) policy. They also assessed when the Bank of England (BoE) could begin lowering borrowing costs and concluded with an update on economic growth in China.

Encouraging inflation reports suggest Fed may cut rates in September

Painter and Lin began by reviewing the U.S. consumer price index (CPI) and producer price index (PPI) readings for May, both of which were published by the Labor Department the week of June 10. In both instances, inflation came in softer than anticipated, Lin said—an encouraging sign after a string of hotter-than-expected inflation reports in the first few months of the year.

Starting with the CPI, he said that core consumer prices—which exclude the more volatile food and energy sectors—rose just 0.2% on a month-over-month basis, compared to expectations for a 0.3% increase. Likewise, annual price gains eased to a rate of 3.4% in May—below both consensus expectations and April's CPI reading of 3.6%, Lin added. Meanwhile, the core PPI—which measures what producers pay for their goods and services—came in flat for May on a month-over-month basis, he noted.

“The CPI and PPI numbers are both good news, as they suggest that U.S. inflation is back on a downward trend toward the Fed’s target rate of 2%,” Lin remarked. He noted that the central bank left interest rates unchanged at 5.25-5.50% at its June meeting, with Chair Jerome Powell stressing that the Fed wants to be more confident that inflation is on a sustainable downward trajectory before cutting rates. That said, Lin believes an initial rate cut may not be too far off in the future.

“Based on how the data has been evolving so far this year, I think Fed officials will likely be in a position to deliver the first rate cut of the cycle in September,” he remarked.

When could the Bank of England begin lowering borrowing costs?

Expanding the conversation beyond the U.S., Lin noted that many other developed-market central banks have also seen inflation cool significantly from its peak. This includes the European Central Bank and the Bank of Canada, both of which recently announced initial 25-basis-point (bps) rate cuts in response to easing price pressures, he said.

Lin added that he believes other central banks will follow suit later this year, including the Bank of England (BoE), whose benchmark rate currently sits at a 16-year high of 5.25%. Due to a higher-than-anticipated inflation report in April, he doesn’t expect the BoE to cut rates at its upcoming June 20 meeting, but thinks that a rate cut later in the summer is possible. “May’s inflation report for the UK will be released soon, and if the numbers are in line with or softer than consensus expectations, I think the BoE will be on track to lower rates at its August meeting,” Lin explained.

Ultimately, he said most developed-market central banks will probably be able to start normalizing interest rates soon, which would bring down the cost of capital and be welcomed by plenty of investors around the globe.

Is China’s 2024 growth target still attainable?

Painter and Lin finished by unpacking the latest inflation numbers from China, which Lin said came in relatively subdued. Broadly speaking, consumer prices were largely flat on a month-over-month basis, he remarked, noting that this makes the country’s economic growth prospects a bit uncertain. That said, Lin stressed that the Chinese government still appears very committed to achieving its 2024 GDP (gross domestic product) growth target of 5%.

“I believe that in order for China to meet this target, it will need to continue rolling out more stimulus measures. The government has stepped up its fiscal stimulus efforts this year, but I think more still needs to be done,” he stated. The fact that price pressures remain relatively muted means that Chinese leaders have the room to do so, Lin added.

“At the end of the day, I’m cautiously optimistic that China will be able to hit its 5% growth target for the year, but I’ll be watching closely for additional stimulus announcements,” he concluded.

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