After US inflation came in lower than expected, investment managers discuss the impact and the timing of a potential interest rate cut.

The US inflation rate fell to 3 per cent in June, beating expectations forecast by economists of 3.1 per cent and falling from 3.3 per cent in May, giving the US Federal Reserve the all-clear sign to start lowering interest rates later this year.

This marks the third consecutive month of declines and it’s the lowest inflation reading in 12 months for the US. Core inflation marginally ticked lower to 3.3 per cent from 3.4 per cent the previous month, sparking predictions for a September rate cut.

Much of this slowdown in inflation came from lower services inflation with the core services, minus housing, (aka Supercore) number coming in at -0.05 per cent which followed a -0.04 per cent print last month. 

Here are some reactions to the figures from investment managers.

Tom Hopkins, senior portfolio manager at BRI Wealth Management
“Today’s reading should bring further confidence to markets. Inflation is on the way back to the 2 per cent target. Despite not being quite there yet, the road is open to a rate cut in the near term and we still expect the Federal Reserve to reduce a restrictive federal funds policy rate by 25 basis points in September.”

John Kerschner, head of US securitized products at Janus Henderson Investors
“Given that the next Federal Reserve meeting is less than three weeks away, the market is currently pricing in that the Federal Reserve will skip that meeting and make their first cut in September. Odds of a cut at that meeting are now close to 100 per cent, according to the market.  Maybe more importantly, the market is now expecting three cuts by the end of January 2025. Chair Powell recently said that the risks toward inflation are now more balanced. Today's number reinforces that view and perhaps now tilts the scale toward concerns of a sharper slowdown in the US economy.”

Ryan Brandham, head of global capital markets, North America at Validus Risk Management 
“The US CPI came in slightly softer than expected. The market will likely take this as support for a September rate cut, and take equities higher and lower US yields. This is a reassuring number for the Fed – the question is, is it reassuring enough to give them comfort to lower rates in September?  At the same time, US Initial Jobless Claims were slightly stronger than expected as the US labor market softens only at a gradual pace. On its own, this would suggest caution against cutting rates in September, but today it will most likely be overshadowed by the CPI number.”

Josh Jamner, investment strategy analyst at ClearBridge Investments
“With recent Fedspeak suggesting the Federal Open Market Committee (FOMC) is coming to the view that the labor market is in better balance, the committee is looking to gain confidence that inflation is on a path to eventually return toward the 2 per cent target, and today’s print combined with the May inflation data should help put committee members minds at ease. The read-through from the CPI release to the Fed’s preferred core personal consumption expenditures (PCE) measure suggests that core PCE should be around 0.2 per cent (or lower) this month. While that could move higher or lower based on tomorrow’s producer price index (PPI) release, something in the 0.2 per cent ballpark would be consistent with a September rate cut in our view.

“Fears that slowing inflation is coinciding with consumer weakness should be somewhat allayed by the rise in prices for Food Away From Home (+0.4 per cent last month) which tends to be a more discretionary category. Similarly, the drop in initial jobless claims as well as continuing claims suggests that while the labor market is normalizing, it isn’t seeing the type of weakness that could spark recessionary worries. This data has been noisier in the wake of the pandemic – particularly over the summer – but suggests that a layoff cycle that could lead to a recession is not currently building.”

Isabel Albarran, investment officer at Close Brothers Asset Management
“This indicates a gradual easing in the US economy alongside cooling labor market indicators. We anticipate the earliest possibility of a rate cut from the Fed in September, with a stronger likelihood in the fourth quarter. Recent FOMC minutes reveal a division within the committee, with some members still concerned about persistent inflation and others now fearing the economy will cool too fast. Economic data certainly does seem to be cooling. While the latest non-farm payroll figures showed a slightly stronger headline print, downward revisions for previous months and softer private payrolls point to deceleration. Coupled with continued progress on inflation, this makes the case for cuts.

“However, just as data is going more the Fed’s way, the upcoming US Presidential Election may be a curveball. Trump’s return to the White House looks increasingly likely, given mounting pressure on Biden to withdraw. This makes the November Fed meeting tricky – a second Trump term is likely to herald increased fiscal spending and borrowing, which could push inflation higher.”

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
“The US inflation downside surprise boosts the odds of a September rate cut or, perhaps, in the fourth quarter of this year. While it’s not a done deal, taken at face value these figures suggest that the ‘sticky’ inflation prints during the first half were due to special factors. This piece of data is coming when the Fed is debating, meeting by meeting, when to cut interest rates.

“We’ve long thought of this being a year of two halves. Slowing growth and easing inflation in the first half, followed by mid-year rate cuts and a gradual recovery in the second half of the year. That’s just what happened in Europe, although growth didn’t slow to the recessionary levels we initially envisioned. We also spoke about an asynchronous interest rate-cutting cycle in the West, with the Fed leading the way as inflation was moderating more markedly in 2023. But US growth has been surprisingly resilient (though beginning to slow more recently), causing inflation to be slightly stickier than expected. The asynchronous rate-cutting cycle has started, but it’s the European Central Bank (ECB) leading the way, with the Fed lagging and the Bank of England somewhere in the middle.”

Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management
“One word: pivotal. With three inflation prints between this morning and September’s Fed meeting, today’s print was crucial in helping the Fed gain confidence that inflation is still moving in the right direction. The economic data heatwave seems to have subsided as we are getting cooler inflation data on the heels of cooler labor market prints last week. Cooler temperatures forecast a Fed cut in September.” 

Andrew Summers, chief investment officer at Omnis Investments
“Core Inflation continues to trend lower, and surprised consensus forecasts on the downside. This data coupled with the softer labor market data should be enough to get the FOMC over the line and begin their cutting cycle. Chair Powell’s testimony to Congress noted that “elevated inflation is not the only risk we face” and his language on the labor market was incrementally dovish relative to the June FOMC minutes. However, given that the FOMC clearly doesn’t want to be seen to be moving too pre-emptively, there is unlikely to be action at the July meeting but a stronger signal of intent given before cutting in September, following two more rounds of data. In our view, there is a significant risk that the current pricing of cuts in 2024 are insufficient.”