United States: Downside inflation surprise probably not enough to stop the Fed

Summary

United States: Downside inflation surprise probably not enough to stop the Fed

• This week provided additional evidence that economy-wide price pressures are gradually easing. Both the headline and core CPI ticked up 0.2% each in June, the lowest monthly advances since early 2021. Core producer prices similarly posted their softest annual increase since February 2021. Although labor demand remains healthy, other indicators suggested that employers may be pulling back on hiring.

• Next week: Retail Sales (Tue), Industrial Production (Tue), Housing Starts (Wed)

International: Bank of Canada open to more rate hikes; EM central banks approaching rate cuts

• While the Bank of Canada lifted policy rates this week, policymakers seemed open to additional rate hikes as inflation persists more than expected. We continue to believe the BoC has achieved its peak policy rate; however, risks are tilted toward at least one more 25 bps hike. On the other hand, central banks in the emerging markets are ready to begin easing monetary policy. Institutions in Latin America are likely to act in the coming weeks and months, while our framework suggests policymakers across regions have space to cut interest rates before the end of this year.

• Next week: Canada Inflation (Tue), United Kingdom Inflation (Wed), Central Bank of Turkey (Thu)

Interest rate watch: Falling inflation brings treasury yields down with it

• This week's cooling inflation data helped generate falling Treasury yields as investors bet that the FOMC would hike the fed funds rate one final time in July but start cutting rates in 2024. As we go to print, the 10-year Treasury is yielding 3.82%, down 24 bps from one week ago. The two-year Treasury yield, which is more sensitive to near-term moves in the federal funds rate, is down 20 bps on the week.

Credit market insights: Rate hikes continue to catch up to lending markets

• U.S. consumer borrowing data were surprisingly soft in May. Total consumer credit rose by "just" $7.24 billion, which not only undercut the Bloomberg consensus forecast by a wide margin, but marked the slowest pace of credit growth since November 2020. The slowdown in credit could indicate that high interest rates are catching up to the economy.

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