Flat US May CPI boosts confidence that Fed is reining in inflation

BY Reuters | ECONOMIC | 06/12/24 08:56 AM EDT

(Reuters) - The U.S. Consumer Price Index was unexpectedly unchanged in May amid cheaper gasoline, but inflation likely remains too high for the Federal Reserve, which concludes it regular policy meeting later on Wednesday, to start cutting interest rates before September.

The flat reading reported by the Labor Department on Wednesday followed a 0.3% increase in April. In the 12 months through May, the CPI advanced 3.3% after increasing 3.4% in April. Economists polled by Reuters had forecast the CPI edging up 0.1% and gaining 3.4% year-on-year.

Excluding the volatile food and energy components, the CPI climbed 0.2% in May, less than April's 0.3% rise. Year over year, the core CPI increased 3.4%, the smallest 12-month gain since April 2021, after a 3.6% advance in April. Inflation continues to run above the U.S. central bank's 2% target.

MARKET REACTION:

STOCKS: The S&P 500 was up 1.1% in early morning trading

BONDS: The 10-year U.S. Treasury yield tumbled to 4.293% and the two-year yield fell to 4.71%FOREX: The dollar index extended a fall to -0.7% and the euro extended its early rise to +0.74%

COMMENTS:

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

"These numbers show inflation is beginning to move in the right direction, I don't know if the Fed will take today's numbers into consideration but obviously it's a comforting number for the Fed and for the markets."

"I'm looking for a less hawkish statement from the Fed and by that, I mean that all eyes will be fixed on the dot plot, and if the dot plot should indicate two rate cuts this year, most likely in the latter part of the year, that would be very welcome news for the market."

"I'm very impressed with the core year-over-year coming in at 3.4%. It is playing into the hands of the Fed in the sense they're data dependent, and they're seeing a reversal of the trend that we saw in the first four or five months of the year. It's good news."

MONA MAHAJAN, SENIOR INVESTMENT STRATEGIST AT EDWARD JONES, NEW YORK

"It's nice to see the trend moving in the right direction again after the first quarter of hotter than expected inflation prints. We're seeing a print now for the month of May that came in cooler than expected. Some of the underlying trends are looking positive ... It looks like even areas like airline fares have moderated."

"When we look at overall energy prices, they seem to have had a nice move lower month-over-month as well."

"Net net this kind of resets the clock for the Fed. They'll still like to see probably two to three prints moving in the right direction before they gain the confidence they need to really start signaling the rate cut, but I do think that this is the first step in that direction."

"We are still waiting for shelter and rent to move meaningfully lower so that could be another driver going forward. And we're still watching the labor market and wage gains to see if that cools. We could get better services inflation. So we still think there's two kinds of catalysts on the horizon that could drive inflation lower, but overall, this is a nice first step in that direction."

ASHWIN ALANKAR, HEAD OF GLOBAL ASSET ALLOCATION, JANUS HENDERSON INVESTORS

"Today's soft CPI puts the Fed back in the driver's seat to steer towards a precautionary cut later this year to ensure recession remains remote. However, at this stage, there is no greater goal than Fed credibility to keep inflation expectations anchored, economic activity robust and financial markets friendly."

"Until greater dis-inflation evidence is seen both in breadth and depth, today's softness is supportive of a preemptive cut rather than a pivot in Fed policy towards accommodation."

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY FINANCIAL, NEW YORK

"This is certainly a piece of good news. If you look at the trend of inflation thus far this year, it had been a bit stickier than we assumed. It seems to be moving in the right direction, after the last two reports. The market had priced in a risk that it would come in hotter than expected, so we're getting a positive reaction in equity markets."

"Today's report helps provide the Fed the ability to feel comfortable that they're making significant progress towards their 2% target."

ADAM SARHAN, CHIEF EXECUTIVE, 50 PARK INVESTMENTS, NEW YORK

"The market was worried inflation would come in stronger than expected, just like the jobs report was stronger than expected Friday. The fact that it did not come in stronger than expected and came in lighter than expected allowed the market to breathe a big sigh of relief."

"The fact that CPI came in below expectations is the catalyst the market was looking for for another leg higher. It also gives the Fed a lot of room to begin easing and/or leaning toward easing rates in the foreseeable future."

LINDSAY ROSNER, HEAD OF MULTI-SECTOR INVESTING, GOLDMAN SACHS ASSET MANAGEMENT (emailed comment)

"It would take an extremely soft CPI print to change the course of the Fed in July after a strong payroll report last week. We squarely believe today is a no-go meeting and the CPI number was not weak enough to change our view on July's meeting. While September may be on the table, today would have had to be the first of a handful of inflation data prints that went right, which it did. It does remain challenging, however for inflation to cool with the backdrop of the summer's heat. Let's see what the Fed forecasts this afternoon. This is good news, but we will need more of it."

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, NEW YORK

"It certainly seems as if the trend in inflation continues to be our friend, working its way lower and taking the street by surprise and causing the futures to jump while the yield on the 10-year note slumped. So, that is going to end up working in favor of the Fed.

"The dot plots are probably already voted in and we think that there's probably a greater likelihood that it will show two rate cuts rather than just one in 2024, but we still think that we're going to get 25 basis point cuts in every quarter through mid-2026."

"This adds to the possibility that investors are going to be optimistic that the market is going to see lower interest rates by the end of the year. Investors are breathing a sigh of relief and seeing the risk assets surge, we will probably end up seeing the growth oriented sectors also show strength when the market opens in an hour."

CHRISTOPHE BOUCHER, CHIEF INVESTMENT OFFICER, ABN AMRO INVESTMENT SOLUTIONS, PARIS (told the Reuters Global Markets Forum)

"The no surprise on CPI data today will bolster the case for a first cut in September... so potentially US yields will adjust on the downside with downside pressure on the dollar."

"Depending on the various contributions because the lagged shelter component is polluting the general figures on CPI. Without shelter, sticky CPI is re-accelerating for few months so that we see one or two max cuts in 2024."

MICHAEL BROWN, MARKET ANALYST, PEPPERSTONE, LONDON

"The May US CPI report is one that should provide the FOMC with some degree of further confidence in the disinflationary process back towards the 2% target, with headline CPI remaining unchanged on an MoM basis, for the first time since last June. Furthermore, core CPI slipped further on an annual basis, hitting a more than 3-year low at 3.4%."

??? "While such data will support the view that April's cooler price data was not a one-off, it is unlikely, on its own, to provide the FOMC with enough confidence to deliver a rate cut just yet, with the next FOMC decision due later today."

??? "Nevertheless, the data does lessen the chances of a hawkish shift in Chair Powell's rhetoric at the post meeting press conference, even if the dot plot is likely to show a median expectation of 50bp, from 75bp, of cuts this year. Markets, as near as makes no difference, now price 2 cuts as the most likely outcome, in line with our base case expectation, for cuts to begin in September, followed by another such 25bp reduction in December."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"The headline number was flat, but that had a lot of uncertainty around it. The core number, which is more signal than noise, was below the consensus. After three months of veering off-track, the disinflation bus is back on the road to 2%."

(Compiled by the Global Finance & Markets Breaking News team)

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