The highly anticipated inflation measure favored by the Federal Reserve for July, set to be released later this month, is expected to provide further insights into the necessity for the central bank to initiate interest rate cuts, according to a recent research note from Morgan Stanley. This analysis incorporates vital data from the July Consumer Price Index (CPI), which was disclosed on Wednesday, leading Morgan Stanley to revise its forecast for core personal consumption expenditures (PCE) inflation.
The firm now anticipates that core PCE inflation will have risen by 0.184% month-over-month in July, compared to a 0.18% increase in June. This incremental growth would catapult the year-over-year core PCE inflation rate to 2.7%, up from the previous 2.63%. In addition, the headline PCE is expected to register at 0.174%, a notable rise from the previous month’s figure of 0.08%.
This indicates that price pressures are not exhibiting a substantial reduction, which could otherwise hint at significant economic weaknesses looming in the near future. The updated forecasts released by Morgan Stanley take into account the insights gleaned from the CPI report, along with data from Tuesday's producer price inflation metrics.
Market participants are closely monitoring the PCE data for July, which is scheduled for release on August 30. Economists at Morgan Stanley, including esteemed analyst Sam Coffin, assert that a core PCE reading consistent with their expectations would mark the fourth consecutive month of sustained disinflation, bolstering evidence that the Fed is poised to commence rate cuts.
"We foresee relatively weak inflationary prints for the remainder of the year and continue to anticipate our first cut in September, succeeded by additional rate reductions at each subsequent meeting through mid-2025," they stated. Nonetheless, the economists clarify that they do not foresee the Federal Reserve enacting a 50 basis-point cut in September, as the current data do not suggest enough weakness to justify such a drastic measure.
The probability of a 50 basis-point cut in US interest rates on September 18 has notably dipped to 28%, down from 51% merely a week ago, based on the CME Group's FedWatch Tool, which integrates this week's consumer and producer price inflation data. Conversely, there remains a 72% likelihood for a more modest 25 basis-point reduction in the fed funds rate.
The CBOE's Volatility Index (VIX), an essential market indicator, stood at 15.31 early Friday. This reflects a continued decline from the elevated levels around 65 earlier in the month, when the dismal non-farm payroll figures for July suggested an impending hard economic landing, further exacerbated by the unwinding of a yen carry trade..