Kelly Evans: The debate is over


It's not as exciting as the CPI report, but the Fed's preferred inflation gauge was out this morning, with more good news on the inflation front. Specifically, the core rose just 0.08 points from May--the smallest monthly gain in nearly four years. The headline was also flat. 

The victory is not yet completely won on the inflation front, but the trends are clear that pressures are dissipating. Crucially, it also comes as the broader economy is slowing, meaning there will be less impetus for prices to move higher in the months ahead. On a three-month average, the core PCE is now running 2.7% annualized--down sharply from the 3.5% pace we saw in April, and 4.5% in March, per BMO's Ian Lyngen.  

Yields on two- and three-year Treasuries slumped after the report, with the two-year yielding less than 4.7% now, versus more than 5% just two months ago. The 10-year is down nearly a half-point in the same timeframe to 4.25%, which will bring some welcome relief to the housing market as stats show activity tumbled in April and May during that mini-rate-spike when the inflation data were running much hotter.  

As for the Fed, today's report certainly helps keep September rate-cut hopes alive. That, plus an ensuing December cut, should help "pave the way for a desired soft-landing for the economy," wrote Nationwide economist Kathy Bostjancic. Fed Chair Powell could begin to message that at the ECB's global central banking forum in Sintra, Portugal next week.  

There are some who warn that inflation could still surprise to the upside, like Mizuho's Steven Ricchiuto. "Although the economy is expected to slow this year, real GDP is still expected to remain somewhat above-trend," he warns, "ensuring inflation remains closer to 3% instead of dropping to 2.4%" as the Fed expects. That in part is due to expansionary fiscal policy, he says, which is resulting in another stunningly high deficit.  

But downward pressure from another key area--consumer retail--could prove to be stronger than expected, notes market strategist Brian Reynolds. Retail inventory growth has accelerated in the past two months, he warns, which "is likely to result in markdowns during the back-to-school and holiday selling periods later this year." Autos in particular are seeing soaring inventory levels now; the flipside of the pandemic-era shortages that drove prices (and insurance rates) sharply higher.  

Meanwhile, former retail stalwarts like H&M, Walgreens, Levi's, and now even Nike have posted disappointing results and guidance as evidence piles up that the sector is in a "selective recession," as J.P. Morgan retail analyst Matthew Boss told us yesterday. Nike shares are down 17% on last night's report, and down 27% since January.  

For now, the disinflationary forces--and trades--are winning the day. 

See you at 1 p.m! 


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