The Fed’s key inflation gauge is expected to fall on June 28 as wholesale prices unexpectedly fell in May and jobless claims jumped to their highest level since August 2023.
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Federal Reserve policymakers said on Wednesday they wanted more evidence that inflation is receding before cutting interest rates. A day later, they got some.
Two reports released on Thursday showed that jobless claims in May jumped to the highest level since August 2023 and wholesale prices unexpectedly fell last month.
The U.S. Department of Labor reported that an estimated 242,000 workers filed initial claims for unemployment insurance in the week ended June 8, an increase of 13,000 from the previous week and nearly 20,000 more than economists forecast.
First-time jobless claims surge
“Jobless claims have been rising for some time, but this week’s sharp increase makes the upward trend even more dramatic,” Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said in a note to clients. Hard to ignore.
Oliver Allen
“High long-term interest rates, tight credit conditions and gradually weakening demand are starting to put more pressure on businesses, especially small businesses,” Allen said. “More layoffs could mean the labor market will soon start to change.” “It’s even weaker, especially when combined with the sharp slowdown in overall hiring that most business surveys show.”
Thursday’s wholesale price report, formally known as the Producer Price Index (PPI), tracks demand, prices and profit margins for commodities such as diesel and eggs, as well as services such as freight and cargo transportation.
The U.S. Bureau of Labor Statistics reported on Thursday that final demand PPI fell by a seasonally adjusted 0.2% in May. Economists had previously expected the overall PPI to fall from a 0.5% increase in April, but the index was expected to maintain a 0.1% increase in May.
Bond market investors, who had already sent mortgage rates tumbling on Wednesday after the latest consumer price index showed inflation slowed in May, continued to rise on Thursday, pushing the 10-year Treasury yield another 6 basis points lower.
Mortgage rates trend downward
Rates on 30-year fixed-rate mortgages, which are largely determined by investor demand for mortgage-backed securities, fell 14 basis points on Wednesday to 6.84%, according to rate lock data tracked by Optimal Blue. A basis point is one hundredth of a percentage point.
That’s down 43 basis points from the 2024 high of 7.27% recorded on April 25, and mortgage rates are likely to continue to track the 10-year Treasury yield on the Mortgage Rate Barometer. An index maintained by Mortgage News Daily showed interest rates on 30-year fixed-rate loans fell again Thursday, but only by one basis point.
Fed’s key inflation indicator will drop on June 28
But mortgage rates are now down nearly half a percentage point from this year’s highs and could rise sharply again when the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, is updated on June 28. decline.
CPI and PPI are important components of the PCE price index. Now that the latest CPI and PPI data are out, forecasters at Pantheon Macroeconomics have calculated what core PCE (excluding food and energy costs) is likely to look like when May data is released in two weeks’ time.
Federal Reserve policymakers drew some momentum from a CPI-driven bond rally on Wednesday when they released economic forecasts, indicating they expect only one rate cut this year, of 25 basis points. Federal Reserve Chairman Jerome Powell said the Fed wants to see more evidence that inflation is moving toward its annual target of 2% before cutting interest rates significantly.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients on Thursday that the Fed’s latest forecasts indicate that they expect core personal consumption expenditures to grow an average of 0.19% per month from May to December.
But Pantheon’s mapping of PPI and CPI data shows that core PCE increased by just 0.11% in May, a sharp slowdown from the 0.32% average increase in the first four months of 2024.
Ian Shepherdson
“We don’t know exactly what policymakers expect in May, but our estimates point to a material downside surprise,” Shepherdson said. At the same time, rent increases have slowed, wage inflation has fallen and The prospect of compression in retailers’ profit margins suggests the core personal consumption expenditures deflator will continue to rise more slowly than the Federal Reserve forecast this week, setting the stage for a first rate cut in September and a number of easing policies this year.
When last updated, the overall PCE index rose 0.26% from March to April, up 2.65% from the same period last year. This is closer to the Fed’s 2% inflation target than the peak inflation rate of 7.12% in June 2022.
Forecasters at Pantheon Macroeconomics predict the Fed will eventually cut the short-term federal funds rate by 1.25 percentage points this year, first by 25 basis points in September and then by 50 basis points in November and December.
While that’s more aggressive than many forecasts, futures markets tracked by CME Group’s FedWatch tool on Thursday showed a 71% chance of two or more rate cuts by the end of the year, up from May 13. 53%.
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