CPI Cools More Than Expected; Gold Spikes by $15

While this data is unlikely to prevent the Federal Reserve from raising interest rates by 25 basis points this month, it may lead to market speculation about whether July will be the last step in this rate-hiking cycle...

At 8:30 PM Beijing time on Wednesday, the latest U.S. CPI data for June, which was just released, showed a larger-than-expected decline. The unadjusted annual CPI rate for June recorded at 3.0%, the smallest increase since March 2021, returning to the "3s"; the core CPI returned to the "4s", with the unadjusted core CPI annual rate recording at 4.8%, the lowest since November 2021.

Additionally, this marks the 12th consecutive month of year-over-year slowing in overall CPI growth, tying the historical longest streak.

After the U.S. CPI data was announced, spot gold surged nearly $15 in a short period before retreating; silver rose more than 1% during the day; the U.S. dollar index plunged 40 points in a short period before recovering some ground.

The most active gold futures contract on COMEX, at 20:30 Beijing time on July 12, saw a transaction volume of 5,802 lots in one minute, with a total contract value of $1.128 billion;

The most active gold futures contract on COMEX, at 20:31 Beijing time on July 12, saw a transaction volume of 2,784 lots in one minute, with a total contract value of $541 million;

The most active gold futures contract on COMEX, at 20:32 Beijing time on July 12, saw a transaction volume of 2,270 lots in one minute, with a total contract value of $442 million.

Although this data is unlikely to prevent the Federal Reserve from raising interest rates by 25 basis points later this month, it may begin to increase the possibility that this will be the final step in the current cycle.

U.S. interest rate strategist Ira Jersey stated that the lower-than-expected core and overall CPI data may not change the Federal Reserve's policy in July, but considering the current price trends, there is indeed a question about a second rate hike.

Swaps traders still believe that a 25 basis point rate hike by the Federal Reserve this month is almost a certainty. However, their estimates for the peak of the federal funds rate in this cycle have been revised down to just below 5.4%. This change in pricing implies that traders now believe the likelihood of the Federal Reserve raising rates again after the expected hike this month is far below 50%.Granular data indicates that used car prices did indeed soften in June, and these factors are considered to be one of the fundamental reasons why inflation has remained so stubbornly high. Airfare prices also declined, which is surprising given the robust travel demand this summer.

Components that increased in June include housing, auto insurance, apparel, recreation, and personal care. Service sector inflation remains very tricky.

Richard Flynn, Managing Director of Charles Schwab UK, stated that a decrease in inflation could boost investor optimism, but he is still closely monitoring the pace of inflation changes.

Although inflation is gradually decreasing, it is still far above the Federal Reserve's 2% target. Core CPI has dropped significantly from its peak levels, but strong consumer spending in the service sector, such as air travel, has slowed efforts to curb price increases. Overall, he expects inflation to remain sticky.

For the market, the new question now is: Is this a genuine turning point? Does it reflect a substantial slowdown in inflation? How will the Federal Reserve respond?

Former New York Fed Chairman Bill Dudley said that this report raises the question of whether July will be the last rate hike. He said he would like to see a slowdown in job growth and some moderation in wage levels. If the labor market is too tight, the inflation rate will not fall back to 2%.

It is worth noting that Federal Reserve policymakers in the 1970s were criticized for making policy mistakes when they lowered interest rates just as inflation began to ease.

After the data was released, Richmond Fed Chairman Barkin continued to "hawk," believing that inflation is still too high, the labor market is still so strong, and there is still doubt about whether inflation can stabilize. Barkin said:

"If future data does not confirm that inflation will return to target levels, I will be willing to take more policy measures. Prematurely exiting (tightening policy) will require the Federal Reserve to take more action."

In addition, setting aside the Federal Reserve's July meeting for now, these data will make Fed Chairman Powell's speech at the annual central banking event, the Jackson Hole Central Banking Symposium, even more important, as it will set the tone for the policy debate for the rest of the year.