Will the interest rate cut in September be determined by tonight's CPI data?

After Federal Reserve Chairman Powell's speech to Congress, the US stock market began to celebrate the rate cut in September, with the S&P breaking through 5600 points for the first time in history. The heavyweight inflation data to be released tonight is expected to add fuel to this optimistic sentiment.

On Wall Street, almost every analyst expects that the US CPI in June will rise more moderately, easing inflationary pressures. If the CPI data meets or falls below expectations, the likelihood of the Fed starting a rate cut cycle in September will significantly increase.

On Thursday night at 20:30 Beijing time, the US Department of Labor will release the June CPI data. According to market consensus:

In June, the overall CPI is expected to decrease from 3.3% in May to 3.1% year-on-year (with a range of 3.0-3.3% from 70 analysts), the lowest record in 5 months; a slight increase of 0.1% month-on-month, compared to the previous 0% (with a range of 0.0-0.2%).

The core CPI (excluding volatile food and energy) is expected to remain at 3.4% year-on-year in June (with a range between 3.3-3.5%); a 0.2% increase month-on-month (with a range of 0.1-0.3%), the same as May, potentially marking the smallest consecutive two-month increase since August last year.

Overall, Wall Street's expectations for June inflation data are highly consistent. Among the 70 analysts surveyed by the media, 55 expect the core CPI to increase by 0.2% month-on-month, with only a few predicting 0.3% or 0.1%.

Bank of America stated that an "another soft inflation report" is expected to give the Fed more confidence, believing that inflation is on the right downward trajectory, although base effects may make the annual rate difficult to show much progress.

If the CPI meets our expectations, we expect the September meeting to remain very active in the market's eyes. Macro data has significantly weakened, with the macroeconomic surprise index at its lowest level since January 2016, which should drive a cooling of inflation, bringing macroeconomics and inflation back into sync

Housing, Used Car Inflation Slows Down

Among major investment banks, Goldman Sachs is relatively conservative about the pace of inflation slowdown, with overall and core CPI growth expectations slightly higher than the market consensus. Goldman Sachs emphasized three key trends in inflation:

Used car prices are expected to continue to decline following auction prices, with a 1.6% year-on-year decrease projected for June. The prices of used cars have already dropped by 28% from their peak at auctions, while CPI used car prices have decreased by 16%, indicating further room for decline in used car prices in this report.

Auto insurance prices will continue to rise, but at a slower pace compared to earlier this year. Goldman Sachs predicts a 0.5% growth in auto insurance, lower than the average 1.3% growth so far in 2024.

Housing inflation, which accounts for one-third of CPI statistics, is expected to slow down from the previous month, with the gap between new leases and renewals narrowing. Goldman Sachs forecasts a 0.36% increase in rent and a 0.39% increase in OER in June; by December 2024, overall housing inflation is expected to rise by approximately 0.34% per month, with rent and OER increasing by 0.25% and 0.37% respectively.

As for other sectors, Goldman Sachs expects airfare prices to remain unchanged, reflecting an increase in online airfare prices by banks, but there may be negative residual seasonal factors; the consumer electronics category may see a slight increase due to residual seasonal factors.

Rate Cut in September?

Federal Reserve Chairman Powell has recently reiterated that inflation is returning to a downward trajectory, but more data is needed to confirm sustained easing of inflation before considering a rate cut. He is shifting his focus from super-core service inflation to the labor market as a key indicator to determine whether inflation is returning to the 2% target.

Federal Reserve officials have also emphasized the need to see a sustained downward trend in inflation before considering easing monetary policy.

If CPI data meets or falls below expectations, it may further support the expectation of a rate cut in September. The market currently expects the Fed to cut rates twice this year, with a full pricing for a rate cut in November and an 80% probability of an initial rate cut in September.

If there is another significant slowdown beyond expectations, the market may begin to fully price in or almost fully price in a rate cut in September. Following Powell's speech, a rate cut in July has been largely ruled out, so there is unlikely to be significant pricing changes in the market regarding this.

Will the U.S. Stock Market Continue to Rally Tonight?

Ahead of the heavyweight CPI release, market expectations have already been reflected in the pricing of risk assets. Powell stated that a rate cut can occur before inflation falls below 2%, reinforcing market bets on a rate cut starting in September. On Wednesday, large-cap tech stocks led a rapid surge in the U.S. stock market towards the end of the session, with [major indices closing up over 1%](https://wallstreetcn.com/articles/3719292? keyword=美股)，标普连涨七日为今年最长纪录，与纳指均至少六日创新高

The U.S. stock market saw a certain degree of increase before the release of CPI data, indicating investors' optimism about slowing inflation and future rate cuts.

Therefore, whether meeting expectations or slightly below, the impact of tonight's CPI on the U.S. stock market may be limited. However, if inflation exceeds market expectations, the market is likely to react strongly, including an increase in bond yields and a decrease in stock prices.

In response to this, analysts at Morgan Stanley have proposed several possible scenarios:

June CPI exceeds expectations, dragging down U.S. stocks.

• If the core CPI month-on-month increase is higher than 0.3% (probability of 2.5%), it may trigger market concerns about recession or stagflation, leading to simultaneous declines in the stock and bond markets, with the S&P 500 falling by 1.25% to 2.5%.
• Data in the range of 0.2% to 0.25% (probability of 30%) is in line with expectations and may result in a more moderate negative reaction, with the S&P falling by 0.75% to 1.25%.

Data below 0.2% will be seen as a positive signal, potentially driving stock market gains.

• In the range of 0.15% to 0.20% (probability of 35%), with calls for a rate cut in September growing louder, the S&P may rise by 0.25% to 0.75%.
• In the range of 0.10% to 0.15% (probability of 15%), the S&P may rise by 1% to 1.5%.
• Below 0.1% (probability of 2.5%), with a rate cut in September almost certain, potentially even boosting expectations for a rate cut in July, the S&P may rise by 1% to 1.75%.

However, analysts also pointed out that even if the CPI data is positive, its impact on the U.S. stock market may not be as significant as in previous months, as the market already has high expectations for two rate cuts within the year.