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.”

Alibaba Group co-founder Jack Ma said competition will make the company stronger and the e-commerce giant needs to trust in the power of market forces and innovation, according to an internal memo to commemorate the company’s 25th anniversary.

“Many of Alibaba’s business face challenges and the possibility of being surpassed, but that’s to be expected as no single company can stay at the top forever in any industry,” Ma said in a letter sent to employees late Tuesday, seen by The Wall Street Journal.

Once a darling of Wall Street and the dominant player in China’s e-commerce industry, the tech giant’s growth has slowed amid a weakening Chinese economy and subdued consumer sentiment. Intensifying competition from homegrown upstarts such as PDD Holdings ’ Pinduoduo e-commerce platform and ByteDance’s short-video app Douyin has also pressured Alibaba’s growth momentum.

“Only with competition can we become stronger and allow the industry to remain healthy,” Ma said.

The letter came after Alibaba recently completed a three-year regulatory process in China.

Chinese regulators said in late August that they have completed their monitoring and evaluation of Alibaba after the company was penalized over monopolistic practices in 2021. Over the past three years, the company has been required to submit self-evaluation compliance reports to market regulators.

Ma reiterated Alibaba’s ambition of being a company that can last 102 years. He urged Alibaba’s employees to not flounder in the midst of challenges and competition.

“The reason we’re Alibaba is because we have idealistic beliefs, we trust the future, believe in the market. We believe that only a company that can create real value for society can keep operating for 102 years,” he said.

Ma himself has kept a low profile since late 2020 when financial affiliate Ant Group called off initial public offerings in Hong Kong and Shanghai that had been on track to raise more than $34 billion.

In a separate internal letter in April, he praised Alibaba’s leadership and its restructuring efforts after the company split the group into six independently run companies.

Alibaba recently completed the conversion of its Hong Kong secondary listing into a primary listing, and on Tuesday was added to a scheme allowing investors in mainland China to trade Hong Kong-listed shares.

Alibaba shares fell 1.2% to 80.60 Hong Kong dollars, or equivalent of US$10.34, by midday Wednesday, after rising 4.2% on Tuesday following the Stock Connect inclusion. The company’s shares are up 6.9% so far this year.

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

“Only with competition can we become stronger and allow the industry to remain healthy,” Ma said