Following the latest weaker-than-expected inflation reports, investors are eagerly awaiting June Consumer Price Index (CPI) report this Thursday to strengthen their expectations of interest rate cuts.

While Federal Reserve Chair Jerome Powell reiterated Tuesday it won't be appropriate to cut the federal funds rate until policymakers obtain "greater confidence" inflation is heading unequivocally toward the 2% target, market expectations currently place a very high conviction on a September rate cut.

Fed futures currently indicate a 71% chance of a rate cut at the Sept. 18 Fed meeting and factor in 50 basis points — equivalent to two cuts — of rate reductions by year-end.

June Inflation Report: Economist Expectations, Potential Market Reactions

• The consensus among Wall Street economists, as tracked by Econoday, predicts headline inflation to decrease from 3.3% in May 2024 to 3.1% in June 2024, year-over-year. Forecasts range between 3.1% and 3.3%.
• Consequently, any lower-than-expected inflation figure would be highly welcomed by market participants, with stocks and bonds — as broadly tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) and the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) — likely gaining ground. In contrast, a figure of 3.3% or higher would be viewed as a disappointment, likely strengthening the U.S. dollar and sending Treasury yields higher.
• On a monthly basis, inflation is seen up 0.1% compared to May 2024, inching up slightly from the previous flat reading.
• Core inflation, which excludes energy and food items, is expected at 3.5% year-over-year, marking a marginal uptick from May's 3.4% print.
• On a monthly basis, core inflation is expected to rise by 0.2%, maintaining the same growth rate as the previous month.

Goldman Sachs' Take

Goldman Sachs analysts Spencer Hill and Ronnie Walker highlight three key component-level trends expected in this month's report.

First, they anticipate used car prices to decline by 1.6%, reflecting continued alignment with auction prices. Second, car insurance prices are expected to rise, though not as rapidly as earlier in the year, with a forecasted 0.5% increase compared to the 1.3% average so far in 2024.

Third, shelter inflation is expected to slow slightly, with rent predicted to increase by 0.36% and Owners' Equivalent Rent (OER) by 0.39%, as the gap between rents for new and continuing leases narrows.

"Going forward, we expect monthly core CPI inflation to remain in the 0.2-0.3% range for the next few months before settling around 0.2% by end-2024," they stated.

Further disinflation is anticipated from rebalancing in the auto, housing rental and labor markets, though offsets are expected from ongoing catch-up inflation in healthcare and car insurance, as well as single-family rent growth outpacing multifamily rent growth.

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