CPI print at -0.1% is the lowest in four years. Fed members have been reiterating that they want to be more confident about inflation reaching the 2% target and the latest June inflation print should help in that regard.
Deceleration in sequential core services momentum is a positive. Latest jobs report also showed that the unemployment rate crossed 4% for the first time since November'21.
Other high frequency indicators pertaining to housing, retail sales and industrial activity have also been softening. As we move lower and to the right in the Phillips curve, we could see the Fed narrative shift.
The market implied probability of a cut in September stands at 90%, compared with 50% a month ago. Markets are pricing in 2.5 cuts by the end of 2024.
We believe cutting rates in a stepwise manner while monitoring how the economy evolves would be a better approach than waiting for disinflationary confirmation for too long and risking an economic accident in the process.
While some major central banks have already cut rates ahead of the Fed, we do not expect them to diverge too much from the Fed and therefore believe what Fed does will have a greater bearing on the Dollar.
We are seeing these