Inflation Cools, Rate Cut Hopes Alive

Cooler inflation data and comments from the Fed caused rate cut hopes to improve.

Both the Consumer Price Index and the Producer Price Index came in lower than expected last week. On a month-over-month basis and a year-over-year basis the two metrics were lower. Among some of the individual components of CPI, some services categories - auto insurance, vehicle repair, and physicians' services - were lower than the previous month and appear to have possibly peaked. A steep drop in airline airfare and gasoline in May's reading of inflation is timely for consumers who will be taking Summer vacations.

The probabilities for a September rate cut by the Fed moved higher on Friday from 55% one week prior to 61%.

This helped push equities higher last week. The Fed's comments from the FOMC meeting last week confirmed the September rate cut hopes, but the new "Dot-plot" of future rate expectations shows the mean rate cuts of only 1 in 2024 but 2-3 cuts in 2025. Meanwhile, the National Financial Conditions Index and the Financial Stress Index reflect loose financial conditions and are not pointing toward a recession in the immediate future. The Atlanta Fed's GDPNow estimate is projecting +3.1% growth in the 2nd quarter. For now, it's steady as she goes for markets.

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