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Please see the below article from EPIC Investment Partners detailing the latest inflation figures and thoughts of the Fed. Received this morning 13/06/2024.

The latest Fed-friendly inflation figures provided considerable relief, as they eased more than anticipated. In May the headline print was flat, while the core reading rose 0.2%. Year-over-year the figures cooled to 3.3%yoy and 3.4%yoy, respectively. The three-month annualised headline CPI fell below 3% for the first time since January. Moreover, the core reading, which decelerated to its lowest level in over three years, was of significant interest given its stickiness. 

Furthermore, the “supercore” measure, i.e. core services less shelter, actually produced a negative print (-0.04%) for the first time since late-2021. So, a considerable cooling from the 0.5% three-month average. On an annualised basis, “supercore” eased to 4.8%, so remains a concern. 

Real average hourly earnings unexpectedly rose to 0.8%yoy with the weekly figure stalling at 0.5%yoy, possibly due to fewer hours worked. 

Although the dis-inflation trend appears to have resumed, policymakers have stressed the need for more evidence of downward momentum before commencing their easing cycle. We believe that while there is a narrative emerging that the inflation report will confirm recent inflation stickiness as merely a temporary blip, it would be premature to make such an assumption, particularly as we have warned that the last “mile” to 2% could be the hardest.

Markets were quick to react, the dollar fell off a cliff, we saw a new all-time high in the S&P Index, and a sharp rally across the US Treasury curve, the 2-year UST yield witnessed the largest single drop so far this year having fallen ~16bps to 4.67%. Futures bets for cuts this year sharply shifted to two cuts, with a ~85% chance as early as September and another by the end of the year. 

Some of the market moves (dollar and USTs) pared back following the FOMC announcement. As expected, the Fed held interest rates steady and signalled it may start cutting rates as late as December 2024, despite continued progress on lowering inflation. The central bank projects only one 25bp cut this year (from three projected in March), followed by four additional cuts (up from three) in 2025, reflecting an outlook for the economy to broadly hold its current trajectory over the next few years. The median core PCE inflation forecasts were revised higher to 2.8% (from 2.6%) and 2.3% (from 2.2%) for this year and 2025, respectively. Futures markets are this morning pricing a 99.9% chance of a cut in November with the possibility of a further cut in December.

Fed Chair Jerome Powell said policymakers see the current policy stance as “about right” and will watch for clear signals from data on inflation, labour market, growth, and risks before adjusting rates further. While leaving the door open to an earlier cut if inflation keeps declining, the Fed appears willing to move cautiously given the uncertain inflation outlook and resilient economic conditions.

Market participants will closely scrutinise PPI data later today, and comments from Federal Reserve officials over the next few days for any indication that the central bank’s rate projections, known as the “dot plots,” failed to fully account for the recent benign inflation data. If policymakers suggest the dot plots are outdated or voice increased concern over persistent inflation, it could reignite speculation of an additional rate cut in 2024.

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Alex Clare