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Get cool, boy: CPI comes in sweet and low



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GET COOL, BOY: CPI COMES IN SWEET AND LOW

Market participants and Fed watchers alike were treated to a refreshing blast of cooler-than-expected inflation on Wednesday.

The Labor Department's hotly anticipated Consumer Price Index (CPI) USCPI=ECI just happened to be released on the same day Powell & Co are set to make their rate decision and provide hints regarding the path forward in its fight against inflation.

And this report delivered the goods.

CPI, which tracks the prices urban consumers pay for a basket of goods and services, was unexpectedly unchanged in May after rising 0.3% in April.

Core CPI, which strips out volatile food and energy items, edged down to 0.2%, below the 0.3% consensus.

Year-on-year headline and core CPI landed at 3.3% and 3.4%, respectively, both cooler than analyst expectations.

Both markets and the Fed are likely to view this report with welcome relief, particularly on the heels of Friday's hotter-than-expected wage growth data.

"I don't know if the Fed will take today's numbers into consideration but obviously it's a comforting number for the Fed and for the markets," says Peter Cardillo, chief market economist at Spartan Capital Securities.

Indeed. The last time core CPI was cooler than 3.4% was April 2021.

"(This will) definitely boost confidence if the trend continues over the next couple of months," says Olu Sonola, head of U.S. economic research at Fitch. "While the door to an interest rate cut in July is effectively shut, the window still looks open for later on this year."

At last glance, financial markets are pricing in a 61.3% likelihood of a 25 basis point rate cut in September, up from 46.8% on Tuesday, according to CME's FedWatch tool.

Drilling below the surface, a 2% drop in energy, a 3.6% decline in both gasoline prices and airfares helped temper the headline figure.

The closely watched services and shelter components rose by 0.2% and 0.4%, respectively.

On an annual basis, those components remain sticky. Services are up 5.2% while shelter prices have risen 5.4%, well north of the core trend.

Back to Friday's uptick in wage growth; taken with today's CPI cooldown, it means "real wages" grew in May at the fastest pace since October 2021.

More money in the consumer's pocket is good news for an economy that depends on consumer spending for 70% of its GDP.

In other news, a dip in the cost of home financing prompted a surge in mortgage applications last week, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate USMG=ECI shed 5 basis points to land at 7.02%; still hovering north of 7%, where it's been since early April.

Even so, the cool-down was enough to goose demand for loans to purchase homes USMGPI=ECI and refinance existing mortgages USMGR=ECI by 8.6% and 28.4%, respectively, resulting in an aggregate 15.6% jump.

"Mortgage rates were trending lower over the course of last week until a stronger than anticipated employment report resulted in a bounce back," writes Mike Fratantoni, MBA's chief economist, who added that improving inventories is "good news for many prospective homebuyers who have been frustrated by the lack of homes on the market."

The 30-year fixed rate is now 25 bps higher than the same week last year, but 88 bps cooler than its October 2023 zenith.

Refi demand is up 27.8% from 12 months ago, while purchase applications are off 11.9% over the same time period.

(Stephen Culp)

*****


FOR WEDNESDAY'S EARLIER LIVE MARKETS POSTS:


LOWER AUTO INSURANCE PREMIUMS AT LEAST SEVERAL QUARTERS AWAY, WILLIAM BLAIR SAYS - CLICK HERE


WALL STREET RALLIES AFTER PRICE DATA, BEFORE THE FED - CLICK HERE


U.S. STOCK FUTURES POP, YIELDS PLUNGE, AS CPI PLEASES - CLICK HERE


TRADE WAR UNLIKELY AFTER EU TARIFFS ON CHINA EVS - COMMERZBANK - CLICK HERE


NO NEED TO RUSH TO BUY FRENCH DIP YET, BARCLAYS SAYS - CLICK HERE


AND THE MOST LIKELY ITALIAN BANKING MERGER IS... - CLICK HERE


BANKS TICK HIGHER BUT AUTOS WEIGH ON STOXX - CLICK HERE


EUROPEAN FUTURES BRUSH OFF DATA AS FED LOOMS - CLICK HERE


US DOUBLE BILL - CLICK HERE



Inflation gauges https://reut.rs/3z0msmZ

CPI shelter and services https://reut.rs/3KCiDH8

Real wage growth https://reut.rs/4cly7Lv

MBA https://reut.rs/4b2Movr

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