US stocks remain near records as Powell fuels rate cut hopes

On Thursday, investors will digest one of the key data points that will shape the Federal Reserve’s future interest rate policy: the June consumer price index (CPI).

The inflation report, due at 8:30 a.m. ET, is expected to show headline inflation of 3.1%, a slowdown from May’s 3.3% increase. That would be the smallest annual increase since January, as another drop in energy prices likely added further downward pressure on headline CPI.

Consumer prices are expected to have risen by 0.1% last month, a slight increase from the flat monthly figures for May.

Meanwhile, based on core prices, which exclude the more volatile costs of food and gas, prices are expected to have risen 3.4% in June from a year ago and 0.2% from the previous month, unchanged from May, data compiled by Bloomberg shows.

“We expect the June CPI report to continue to boost confidence, following May’s undeniably strong report,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note last week.

Economists said that while the expected numbers are “not as low as in May, it would be a good sign for the Fed.”

Thursday’s inflation figures come at a critical time for the central bank, as slowing labor market growth, coupled with recent testimony from Federal Reserve Chairman Jay Powell, have kept hopes of a rate cut alive.

Powell, who is set to wrap up his semiannual policy update to Congress on Wednesday, has largely stuck to his data-driven narrative — a positive sign given the recent positive data. On Tuesday, he told the Senate Banking Committee that while there is evidence of cooling inflation, the Fed still needs more “good data” to be sure inflation is moving toward its 2% target.

Core inflation has remained stubbornly high due to higher costs for housing and core services such as insurance and medical care. In May, non-housing services “surprisingly declined slightly in May, largely due to a slight decline in motor insurance,” Bank of America’s Juneau and Gapen noted.

However, economists expect the service sector (and auto insurance) to have risen in June, pointing to a bumpy path forward for price stabilization.

“Non-housing inflation is expected to moderate over time as wage inflation in the services sector declines. However, a prolonged period of deflation is unlikely,” they warned.

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