Slowing U.S. Inflation Fuels Expectations of Interest Rate Cuts

The U.S. Federal Reserve’s preferred inflation gauge met forecasts in May, keeping alive expectations that interest rates could fall faster than policy makers forecast.

The core Personal Consumption Expenditures Price Index, which excludes volatile energy and food prices, increased 2.6% from a year ago, slowing from April’s 2.8% pace. The reading met the consensus of economists surveyed by The Wall Street Journal.

Core PCE inflation rose 0.1% in the month, compared to a 0.2% increase in April. The headline 12-month reading was 2.6%, slowing from April’s 2.7% pace. In the month, the PCE was flat after rising 0.3% in April, marking the first time consumer prices didn’t go up in six months.

Consensus was met in all readings.

The Fed targets 2% inflation.

“The overall trend we’ve been seeing of disinflation in general isn’t always going to be a smooth ride,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. He expects inflation to keep ticking lower in coming months. “It may be a little more difficult finding out that last mile to get to the Fed 2% goal.”

Treasury yields fell following the data release. Markets have been mostly pricing in an initial 25-basis point interest rate cut in September, plus a second trim still in 2024, according to CME data. Fed officials project only one cut this year. They have said repeatedly that inflation data will determine their next step, and some even left the door open to an interest rate increase.

Forecasts of a more aggressive easing cycle rely mostly on estimates that inflation could collapse as the economy is weighed down by high borrowing costs.

June PCE inflation is due July 26, just ahead of the next rate-setting Fed meeting on July 30- 31.

Inflation is unlikely to accelerate as it did earlier this year, said Scott DiMaggio, director of global fixed income at AllianceBernstein . He warned that year-over-year readings are likely to decline more slowly when compared to the weakening gauges of late 2023.

“We still have some sticky components specially on the services side and that is going to take time to move down,” he said. “We don’t see us getting back to the Fed target until 2025.”

Australian shares fell on Thursday as Wall Street weakness, rising oil and persistent rate concerns weighed on most of the market.

The S&P/ASX 200 declined 0.72 per cent to 8,702. The All Ordinaries lost 0.66 per cent to finish at 8,897. Mining stocks were hit particularly hard, while real estate also dragged on the index.

Energy was the notable exception, gaining more than one per cent as Brent crude traded above US$103 a barrel. Oil had moved higher amid uncertainty surrounding potential US diesel-export restrictions and broader geopolitical supply risks. The move supported energy producers but renewed concern about inflation inputs across transport and the wider economy.

Gold shares were weak even as spot bullion remained historically elevated. The All Ordinaries Gold index fell about 2.25 per cent, showing that equity performance can diverge from the commodity because of valuation, currency, operating and company-specific factors.

Zip was a prominent loser, falling 11.38 per cent after the company reported short sales after the previous close. Nine Entertainment also weakened after UBS analysts warned of near-term revenue challenges associated with its advertising-supported subscription tier.

Premier Investments led larger winners despite caution about the retail environment. Breville, in which Premier owns a significant stake, also appeared among leading movers. In the broader ASX 300 screen, Myer gained 11.43 per cent and MAAS Group rose 7.93 per cent, while Lotus Resources fell 10.53 per cent. These percentage moves should be checked against company announcements and trading liquidity before attributing causes.

The Australian dollar was broadly flat at US70.38 cents. Spot gold was around US$4,280 an ounce, Brent crude approximately US$103.08 a barrel and iron ore near US$96.90 a tonne late in the session.

The rate outlook remains the central domestic catalyst. Labour-market weakness has not eliminated the possibility of an RBA increase next week, leaving banks, listed property and other rate-sensitive sectors exposed to changing expectations.

Market dashboard

S&P/ASX 200: 8,702, down 0.72 per cent.

All Ordinaries: 8,897, down 0.66 per cent.

Best sector: Energy, up more than one per cent.

Weakest areas: Real estate and materials were the major drags; confirm final sector percentages before publication.

Material winner: Premier Investments led the large-company gainers. Confirm its final closing move from the ASX before publication.

Material loser: Zip, down 11.38 per cent.

ASX 300 percentage leader: Myer, up 11.43 per cent.

ASX 300 percentage laggard: Zip, down 11.38 per cent.

AUD/USD: Approximately US$0.7038, broadly flat.

Slowing U.S. Inflation Fuels Expectations of Interest Rate Cuts

Inflation unlikely to accelerate as it did earlier this year, said AllianceBernstein’s Scott DiMaggio