Key inflation report looms on Thursday as traders grow more confident in Fed rate cut

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.

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.

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.

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.