Promising Inflation Numbers Could Signal Rates Cut Sooner

American consumer inflation as measured by CPI has slipped into “deflation” territory on a month-to-month basis, solidifying the inevitability of rate cuts.

What’s the Scoop?

• Deflation Arrives: CPI and its core components came in under analyst expectations in this morning’s report, with month-over-month CPI inflation falling by 0.1% during June, the index’s first negative print since May 2020.
• Pricing in Cuts: The odds of a policy rate cut at the Fed’s July meeting have nearly doubled from yesterday to 9%, meanwhile, markets are now pricing in an 83% chance of at least one cut by the September meeting.

Bankless Take:

Market participants have eagerly awaited rate cuts since the moment rate hikes commenced over two years ago; hard confirmation that deflation is present combined with continued softening in the labor market finally provides Fed officials cover to cut.

Although many pundits are now ironically advising to prepare for inflation and correspondingly higher asset valuations given the presence of deflation, believing that lower rates will reignite spending, this view ignores that markets had already been priced to perfection in anticipation of cuts and the strong likelihood that deflation will begin weighing on corporate profits as it has in cycles past to kick off economic contraction.