Just one cooling CPI data away from the Fed's rate cut in September

The non-farm payroll report shows a slowdown in the labor market, with the market's focus shifting to the June CPI data to be released this Thursday.

After the non-farm data was released last Friday, the swap market pricing increased the bet that the Fed will start its first rate cut of the year in September. The CME Group's FedWatch tool shows that the swap market expects a 71.6% probability of a 25 basis point rate cut by the Fed in September.

Analysts believe that the June non-farm data has strengthened the market's expectations of a rate cut in September, and this week's CPI report is expected to be another confidence booster.

Will June CPI Confirm Expectations of a Rate Cut in September?

The U.S. June non-farm payroll report shows a decrease in new job additions compared to the previous month, with the unemployment rate rising from 4% to 4.1%, the highest level since November 2021. Additionally, the new job additions for April and May were revised down by a total of 111,000, all indicating a cooling labor market.

Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, stated in a report:

"Federal Reserve officials are increasingly concerned about downside risks in the labor market, and the June data support our forecast of rate cuts by the Fed in September and subsequent meetings."

Neil Dutta, Chief Economist at Renaissance Macro, also stated that the June non-farm payroll report "solidifies expectations for a rate cut in September."

However, the economic cooling reflected in this non-farm data is just one aspect, with inflation remaining a key factor blocking the Fed's path to rate cuts.

The May data shows that the year-on-year growth rate of core CPI has dropped to a three-year low, indicating effective inflation resistance. This means that Thursday's CPI data will likely have a significant impact on whether the Fed can cut rates in September.

According to the median estimate of economists surveyed by Bloomberg, the year-on-year growth rate of core CPI in June is expected to remain unchanged from the previous month at 3.4%; the year-on-year growth rate of CPI in June is expected to further slow to 3.1%, showing a steady downward trend towards the target inflation.

Stephen Juneau, economist at Bank of America, predicts:

"Following the strong performance in the May report, the June CPI report will be another confidence booster."

As of the time of writing, the CME Group's FedWatch tool shows that the swap market expects a 71.6% probability of a 25 basis point rate cut by the Fed in September

In addition, this Tuesday and Wednesday, Powell will go to Capitol Hill to deliver semi-annual monetary policy testimony, when investors will closely watch for any remarks he makes regarding monetary policy