Instant view- Tame US June CPI smoothes path for Fed ease

(Reuters) - U.S. consumer prices unexpectedly fell in June and the annual increase was the smallest in a year, reinforcing views that the disinflation trend was back on track and drawing the Federal Reserve another step closer to cutting interest rates.

The consumer price index dipped 0.1% last month after being unchanged in May, the Labor Department said on Thursday. It was the second straight month of tame CPI readings, and could help to bolster confidence among officials at the U.S. central bank that inflation was cooling.

In the 12 months through June, the CPI climbed 3.0% and followed a 3.3% advance in May. Economists polled by Reuters had forecast the CPI ticking up 0.1% and gaining 3.1% year-on-year.

MARKET REACTION:

STOCKS: The S&P 500 was up 0.04% in early trade.

BONDS: The 10-year U.S. Treasury yield tumbled to 4.189% and the two-year yield fell to 4.515%FOREX: The dollar index extended a fall to -0.59% and the euro extended its early rise to +0.41%

COMMENTS:

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“These are good numbers, obviously, and (this report is) good news for the Fed. It’s good news for the consumer and good news for the economy. The Markets are going to like these numbers.”

“This report basically upholds Powell’s thinking of that 2% inflation rate will be achievable.

Powell has been indicating a rate cut in September. These numbers sell that.”

“If we have another good inflationary report in August, then I think we could see at least two rate cuts this year, possibly three.”

“If macro indicators should weaken over the next thirty days there could be a surprise move by the Fed.”

JOHN LYNCH, CHIEF INVESTMENT OFFICER, COMERICA WEALTH MANAGEMENT, CHARLOTTE, NORTH CAROLINA (emailed note)

"Great news on the inflation front. The 3.0% YOY print helps support prospects for a Fed rate cut in September."

"Since the federal funds rate (5.25%-5.00%) remains above nominal GDP growth of approximately 5.0%, we look for two cuts in the coming months to ensure monetary policy gets less restrictive. Beyond that, however, investors should be careful what they wish for…if the Fed cuts much beyond that, it will be because the Fed HAS to cut! That is not an environment conducive for economic or market growth."

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

"The numbers came in much better than expected, which speaks directly to the possibility of a September rate cut. I think it also brings into question the possibility a July rate cut, although those chances are quite slim. The market is really going to be banking on a September cut."

LOU BASENESE, PRESIDENT AND CHIEF MARKET STRATEGIST, MDB CAPITAL, NEW YORK

"The data finally is fitting into investors' narrative that the Fed is going to cut rates. We had those 2-3 months of hot prints, and now we're seeing a decrease. I think this is the first step in the green light. The next question that comes after this is, is this decrease sustainable? I think we get a glimpse and an answer to that tomorrow with the PPI report. If we see that the PPI is also decelerating, then I think now they've got a green light to cut before the election."

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH

“Powell spent the past two weeks emphasizing they (the Fed) are data driven. And I'm going to take him at his word. This data shows that what happened in the first quarter may have been some sort of anomaly and that inflation is headed down. PCE was pointed in the right direction as well. And certainly, another month of this (data) gives them the ability to do cut rates in the September meeting.”

IAN LYNGEN, HEAD OF US RATES STRATEGY, BMO CAPITAL MARKETS (emailed note)

"The net of the data reinforces the dovish messaging from Powell and offers confirmation that the Fed's tighter policy stance is weighing on consumer price inflation … Treasuries are stronger in the wake of the release and we suspect that the net of this week's bond bullish events will set the tone for the coming weeks and embolden dip-buyers as the cooling inflation data sets the Fed up well to begin cutting in September."

(Compiled by the Global Finance & Markets Breaking News team)