U.S. July CPI: Mild Inflation Drop Boosts Odds of a 25BP Rate Cut in September

July CPI Year-over-Year Growth: +2.9%, previous +3.0%, market expectation +3.0%; Seasonally adjusted month-over-month CPI growth: +0.2%, previous -0.1%, market expectation +0.2%.

Core CPI Year-over-Year Growth: +3.2%, previous +3.3%, market expectation +3.2%; Seasonally adjusted month-over-month core CPI growth: +0.2%, previous +0.1%, market expectation +0.2%.

Housing and Energy Prices: July housing prices month-over-month growth rose to +0.4%, energy prices month-over-month growth stabilized at 0%.

Core Goods and Services: Core goods year-over-year growth declined to -1.9%, core services prices year-over-year growth slowed to +4.6%.

Housing Prices: July housing prices month-over-month growth rose to +0.4%, with primary residence rent, and owners' equivalent rent month-over-month growth rose to +0.5% and +0.4%, respectively.The rebound in the month-over-month growth of housing prices in July indicates that the cooling trend in housing prices is not yet stable. Nonetheless, leading indicators such as market rents show that since June, the month-over-month growth of rent prices has been decreasing, with the year-over-year growth stabilizing, suggesting limited room for a rebound in housing inflation.

Energy Prices: Since early June, crude oil prices have rebounded from low levels but started to decline again after mid-July, indicating that the impact of oil prices on inflation is expected to moderate.Influenced by earlier geopolitical conflicts and peak market trading season expectations, crude oil prices have rebounded since early June, stabilizing refined oil prices. However, after mid-July, oil prices started to decline due to trade tensions and recession expectations. Given the current backdrop of slowing demand and anticipated supply recovery in Q4, the impact of oil prices on inflation is expected to gradually diminish.

Core Services Prices: Excluding housing, the year-over-year growth of core services prices slowed to +4.6%, with healthcare services prices declining month-over-month to -0.3%.Data shows a decrease in the month-over-month growth of healthcare services prices, while transportation services prices rose month-over-month to +0.4%, up from last month’s -0.5%, mainly due to the peak travel season in summer.

Core Goods Prices: The year-over-year growth of core goods prices declined to -1.9%, with noticeable declines in clothing, used cars, and trucks prices.Data shows that the month-over-month growth of clothing, used cars, and trucks prices dropped to -0.4% and -2.3%, respectively, down from last month’s +0.1% and -1.5%, indicating a decline in consumer purchasing power.

Rate Cut Probability: Based on current economic and inflation data, the market is leaning towards a 25BP rate cut in September rather than 50BP.Considering the continued cooling of U.S. consumer spending and labor market, limited housing inflation rebound, and relatively weak oil prices, the likelihood of further increases in month-over-month CPI growth remains low. If the month-over-month CPI continues to stay within +0.2% in the coming months, the year-over-year CPI growth in the U.S. could continue to decline before September, opening the window for a rate cut in September.

Market Reaction: Following the data release, U.S. stocks broadly rose, gold prices retreated from high levels, and the dollar index and U.S. Treasury yields rebounded after an initial decline.This reflects the market's view that the U.S. economy is more likely to experience a soft landing rather than a recession. According to CME FedWatch, the probability of a 25BP rate cut in September increased to 62.5%, up from 47.0% the previous day; the probability of a 50BP rate cut decreased to 37.5%, down from 53.0% the previous day.

The July U.S. inflation data continued the cooling trend, broadly in line with market expectations. While the month-over-month growth of housing and energy prices saw some rebound, the inflation of core goods and services continued to slow, indicating ongoing cooling in consumer spending and the labor market. The U.S. inflation data suggests that inflation will remain on a cooling trajectory, with the economy cooling in an orderly manner, making a significant rate cut unlikely, with around a 25BP rate cut expected in September. The performance of future non-farm payroll data will be a key factor determining.