It certainly did not disappoint. It was very similar to poker, where the flop (CPI report) is shown first. Then we moved to the bend (dot charts) and finally the river (McCoy Powell). Overall, it ended up being a push and pull by the time we wrapped things up yesterday. It was a case The CPI gives, Powell takes away.
Looking at the US CPI report first, there were minor errors in estimates across the board. But what did the details say?
One of the highlights of yesterday's data was that superinflation turned negative for the first time since September 2021.
This is a notable development and owes much to the first decline in car insurance rates, also since 2021. This comes after a lot of volatility in car insurance for at least the past two years. But if this is a real sign that it is starting to pass, then it could be said that we are seeing moderate to healthy price patterns.
In terms of annual readings, the auto insurance rate reached 20.3% year over year in May. This represents a decline from 22.6% year-on-year in April. In some context, auto insurance contributes a very large portion to the premium rates detailed in the report:
If we are at a turning point, this should see further moderation in the overall report as well in the coming months. The only question now is whether shelter prices will start to converge, but that may be a late issue.
So, yesterday's inflation report was certainly progress but there should be more of that in the coming months. It's all about consistency now at this point.
As for the Fed, the dot plots were the first point of focus and indicated only one rate cut for the year. Of course, the situation remains fluid in the coming months. However, policymakers had time to scrutinize the CPI numbers but still decided it was not enough to push too hard.
I think this is a wise and better safe than sorry approach, more than anything else. Powell reiterated this, stressing the need to wait for more data before committing to anything.
In essence, markets were excited about the possibility of urgent interest rate cuts, and that enthusiasm was dashed by the Fed.
At the beginning of yesterday, traders were expecting interest rates to be cut by about 40 basis points for this year. Now that the dust has settled, we are seeing a rate cut of approximately 44 basis points. This may not represent a huge change but expectations have changed a little.
Previously, traders were eyeing November as the likely timeline for the first move. Now, there is hope for at least the September batch. The odds of that are now around 66% but well below around 80% after yesterday's inflation numbers.
However, in the bigger picture, we are still pushing and pulling between one and two rate cuts this year. As long as the Fed maintains a steady cap there, it is difficult to bet too much on prolonged dollar weakness until we get more data like the one released yesterday.
I mean we've seen how this happens before. One only has to look at last month's CPI report. Shift next Thursday?