If a CPI is not enough to prove that the Federal Reserve can cut interest rates, what about adding the PPI?
On Thursday, with a series of latest economic data proving that inflation and the labor market in the United States are cooling down, US bond yields are once again weakening across the board. The recent sluggish performance of multiple sets of economic data seems to be significantly weakening the credibility of the hawkish stance of the Federal Reserve to some extent - just one day after the interest rate chart released by the Federal Reserve on Wednesday predicted that there would only be one rate cut this year, the pricing of the interest rate swap market returned to the expectation that the Federal Reserve would cut rates twice within the year.
This is almost openly going against the Federal Reserve
The data released by the US Bureau of Labor Statistics on Thursday showed that, like the CPI just released the day before, the four key indicators of the May PPI - the overall and core PPI year-on-year and month on month indicators - were all lower than market expectations without exception!
The data shows that the PPI in May decreased by 0.2% month on month, with an expected increase of 0.1%. From a year-on-year perspective, after a 2.3% increase in April, the PPI increased by 2.2% in May, which is also lower than the expected 2.5%. Excluding food and energy categories with significant fluctuations, the core PPI in May increased by 2.3% year-on-year, lower than the expected 2.4%; The core PPI showed zero month on month growth, lower than the expected 0.3%.
The simultaneous significant decline in CPI and PPI can actually be inferred as one thing: the core PCE inflation indicator, which is most favored by the Federal Reserve, is likely to achieve its lowest increase in the second half of the year in May.
From the details of index preparation, several key categories that make up the PPI index will also affect the PCE price index released later this month. Considering the weak CPI situation, several Wall Street analysts have predicted that the core PCE price index will only grow by 0.1% month on month in May. If that's the case, there is great hope to provide more support for the two rate cuts this year.
Ian Shepherdson, Chief Economist of Pantheon Macroeconomics, wrote in a report to clients, "Our analysis of PPI and CPI data suggests that the core PCE deflator index may only have risen by 0.11% in May, far below the average growth rate of 0.32% in the first four months of this year.". Shepherdson pointed out that the slowdown in rent increases, a decrease in wage increases, and the prospect of retail profit margins being compressed indicate that the core PCE deflator index will continue to rise slower than the economic forecast made by the Federal Reserve this week, laying the foundation for interest rate cuts starting in September.
Other analysts also believe that the increase in core PCE indicators will not be significant. Paul Ashworth, Chief North American Economist at Capital Economics, stated that the bank expects a growth rate of 0.11%. Citigroup economists predict it to be 0.15%.
In addition to the PPI, the latest initial unemployment benefit data released on Thursday further confirms that the once hot situation in the US labor market has been shaken. As of June 8th, the number of initial jobless claims in the United States for the week was 242000, significantly higher than the expected 225000, which is also the highest level of weekly initial jobless claims since August last year.
It can be said that as inflation cools and economic and employment indicators continue to weaken, the threat of stagflation faced by the US economy has significantly subsided to a large extent.
At the same time, the necessity of lowering interest rates at a certain point in the second half of the year is undoubtedly increasing.
Based on the latest pricing in the interest rate market, traders are currently expected to see the Federal Reserve cut interest rates by 49.7 basis points within the year, in other words - they have almost fully priced two rate cuts. People don't seem to believe the median forecast of the Federal Reserve's interest rate cut once a year, as shown in the June chart!
According to the FedWatch tool of the Chicago Mercantile Exchange, the market believes that the likelihood of the Federal Reserve cutting interest rates by at least 25 basis points at its September meeting is about 68%, slightly higher than the previous trading day.
In the US bond market, due to the latest US economic data, the yield of US bonds with different maturities further weakened on Thursday. As of the end of the New York session, the 2-year US Treasury yield fell 5 basis points to 4.71%, the 5-year US Treasury yield fell 7 basis points to 4.252%, the 10-year US Treasury yield fell 7 basis points to 4.249%, and the 30-year US Treasury yield fell 7.6 basis points to 4.4%.
The 10-year US Treasury yield, known as the "anchor of global asset pricing," has now reached its lowest point in three months:
Colin Martin, fixed income strategist at Schwab Center for Financial Research, said, "When you look at today's PPI and yesterday's CPI, there is undoubtedly good news for inflation. Of course, a month's report does not represent a trend, but we need to see such numbers and reports to be confident that inflation is decreasing, and the Federal Reserve can also be confident that inflation is decreasing."
Some industry insiders even believe that based on CPI and PPI data, the latest "dot matrix" released by the Federal Reserve on Wednesday may be outdated. It is worth mentioning that Federal Reserve Chairman Powell had revealed at the time that the meeting had initially included CPI data for that day. "Some people did update their forecasts, but most people did not do so."