Comprehensive cooling of inflation! The US June CPI turned negative for the first time in four years on a month-on-month basis, with the core year-on-year growth rate hitting a new low in over three years

In June, U.S. inflation cooled significantly, with the overall CPI month-on-month growth rate turning negative for the first time in four years, and the core year-on-year growth rate hitting a new low in over three years. Expectations for interest rate cuts within the year have significantly increased, with the likelihood of a first rate cut in September rising to 80%, and the probability of a rate cut in July reappearing.

On Thursday, July 11th, the U.S. Department of Labor released data showing that the U.S. CPI rose by 3% year-on-year in June, slightly lower than the expected 3.1%, and further declined from the previous value of 3.3%, with a 0.1% month-on-month decrease, in line with expectations, and the first negative turn since May 2020.

The core CPI in June (excluding more volatile energy and food prices) rose by 3.3% year-on-year, lower than the expected 3.4% and the previous value of 3.4%, marking the lowest level since April 2021; with a 0.1% month-on-month increase, below the expected and previous values of 0.2%, representing the smallest increase since August 2021.

The closely watched super inflation indicator (core services CPI excluding housing) rose by 0.1% month-on-month, but the year-on-year increase fell below 5.0%.

Following the data release, U.S. stock index futures surged, U.S. bond yields quickly fell, with the 10-year Treasury yield dropping by nearly 10 basis points, and the U.S. dollar index extending its decline.

Will there be three rate cuts this year?

It is worth noting that this is the third consecutive time that CPI has fallen below Wall Street expectations, reigniting expectations for a rate cut in July, with both the 3-month and 6-month annualized inflation rates showing declines.

However, the probability of a rate cut in July is still very low at the moment.

Meanwhile, derivative traders have raised the probability of the Fed starting rate cuts in September from around 70% before the data release to over 80%. For the full year 2024, contracts imply a rate cut of 57 basis points, indicating at least two 25 basis points rate cuts; Earlier by about 49 basis points.

"The prerequisites for starting rate cuts in September and issuing a series of subsequent rate cut signals are now in place," said Ed Al-Hussainy, interest rate strategist at Columbia Threadneedle Investment.

Traders expect a 25% chance of the Fed cutting rates three times by 25 basis points within the year.

Gasoline prices fall, housing inflation is accelerating slowdown

By sector, the year-on-year inflation rates for goods and services both declined , with the price increase for goods narrowing to the lowest level since February this year.

Specifically:

In June, energy prices rose by 1% year-on-year, fell by 2.0% month-on-month, the same as the previous month. Among them, after a 3.6% month-on-month decline in May, gasoline prices fell by 3.8% in June, offsetting the impact of rising housing prices; down by 2.5% year-on-year.

Prices of used cars and trucks fell by 1.5% month-on-month, communication costs fell by 0.2%, and new car prices fell by 0.2%.

Focusing on housing inflation in the core CPI, it is accelerating its slowdown:

Looking at the month-on-month data, housing prices rose by 0.2% in June. Among them, rents rose by 0.3% that month, and the Owners' Equivalent Rent (OER) also rose by 0.3%, both the smallest increases since August 2021. In addition, the index for lodging away from home fell by 2.0% in June, compared to a 0.1% decrease in May.

Looking at the year-on-year data, the housing inflation rate in June fell by 5.16% year-on-year, lower than the 5.41% in May, the lowest level since May 2022; rent inflation rose by 5.07% year-on-year in June, lower than the 5.30% in May, the lowest level since April 2022.