Slowing Inflation Opens Door for Lower Rates
July 17, 2024
Last week bonds rallied while the stock market broadened after June’s Consumer Price Index (CPI) report surprised to the downside. On an annual basis, headline CPI fell from 3.3% to 3%, the slowest 12-month price gain in a year.
While falling gas prices helped to cool headline prices, one of the stickier components of inflation also showed progress. Shelter, a proxy for housing, declined 0.3% to 5.1% year over year in June, its lowest reading since April 2022. Core CPI, which excludes the more volatile energy and food prices, also declined from a year-over-year increase of 3.4% to 3.3%.
The lower-than-expected inflation report combined with a softening labor market bolstered hopes for lower rates. Investors are now pricing in 75 basis points of rate cuts this year with the first occurring in September. While our rate cut outlook was for "less and later" than the market was expecting, we now believe the Fed has the evidence needed to cut as soon as September followed by at least one more cut by year end.
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