Economics
June CPI inflation report preview
An Aldi supermarket in Alhambra, California, on June 27, 2024.
Eric Thayer | Bloomberg | Getty Images
A widely anticipated inflation report on Thursday may solidify expectations for the Federal Reserve to cut interest rates in coming months.
The consumer price index, or CPI, report for June is due out at 8:30 a.m. ET. Recent economic releases have suggested that inflation and economic growth are both cooling, including last week’s report that unemployment in June ticked up to 4.1%.
Thursday’s report comes after Federal Reserve Chair Jerome Powell delivered two days of testimony on Capitol Hill this week. The central bank chief did not indicate when exactly rate cuts will begin. However, Powell did say the Fed sees the risks to the economy as more in balance between inflation and recession and that the central did not need to wait until inflation hit the 2% level to cut rates.
What to watch for
Economists surveyed by Dow Jones are looking for CPI to rise 0.1% month over month, and 3.1% year over year. The core CPI, which strips out more volatile food and energy prices, is expected to rise 0.2% from May and 3.4% since June last year.
In May, CPI was unchanged month over month and up 3.3% on an annual basis.
Focusing on the trends of unemployment and inflation could bolster the case for rate cuts, said Matt Brenner, managing vice president, investments and product management at MissionSquare Retirement.
“The level on inflation is still elevated relative to the Fed’s [2%] target. The level on unemployment is still very low historically at 4.1%. But the trend in both is that unemployment is gradually starting to pick up and that inflation continues its downward trajectory,” said Brenner.
“For some time the Fed has been more focused on levels, and now it seems that they may be starting to tilt more towards a focus on trend. And if that’s the case, then the chances of a rate cut go up,” Brenner added.
The price changes in the components that make up the CPI index will also be a focus on Thursday, especially if the number comes in different from expectations. Shelter and medical care services could be key areas to watch, said Wilmington Trust Chief Investment Officer Tony Roth.
Both shelter and medical services are also key parts of the personal consumption expenditures index, the Fed’s preferred inflation measure, rather than CPI.
“We’ve seen medical services [be] pretty tame, and that’s important because medical services makes up a much bigger portion of the PCE, which is the more important of the two inflation prints,” Roth said.
Market effect
The CPI report comes as markets are on the upswing.
Stocks and bonds have both rallied in July as traders grow more confident in a rate cut sometime this year. The S&P 500 crossed 5,600 for the first time on Wednesday.
The stock market has rallied in July, with the S&P 500 hitting another record high on Wednesday.
Fed funds futures pricing shows traders are expecting the Fed to hold rates steady at its meeting later this month, and then cut in September, according to the CME FedWatch Tool. A month ago, the chances of another pause in September were close to a toss-up, according to the same tool, which uses 30-day fed funds futures to come up with implied probabilities.
The expected hold in July could keep Thursday’s CPI report from being a big market mover, Bank of America rates strategist Meghan Swiber said in a note to clients Wednesday.
“Cooling activity and limitations on near-term cut pricing should confine market response in either direction,” Swiber said.
However, Wilmington Trust’s Roth said stocks could rally if the inflation reading is cooler than expected because some investors have not shaken their fears from earlier this year, when inflation briefly ran hotter.
“I don’t think that the market has fully appreciated the weakness in the economy, or the fact that inflation is clearly in the rear view mirror,” Roth said.
— CNBC’s Michael Bloom contributed reporting.
Production at the VW plant in Emden.
Sina Schuldt | Picture Alliance | Getty Images
The struggling German economy has been a major talking point among critics of Chancellor Olaf Scholz’ government during the latest election campaign — but analysts warn a new leadership might not turn these tides.
As voters prepare to head to the polls, it is now all but certain that Germany will soon have a new chancellor. The Christian Democratic Union’s Friedrich Merz is the firm favorite.
Merz has not shied away from blasting Scholz’s economic policies and from linking them to the lackluster state of Europe’s largest economy. He argues that a government under his leadership would give the economy the boost it needs.
Experts speaking to CNBC were less sure.
“There is a high risk that Germany will get a refurbished economic model after the elections, but not a brand new model that makes the competition jealous,” Carsten Brzeski, global head of macro at ING, told CNBC.
The CDU/CSU economic agenda
The CDU, which on a federal level ties up with regional sister party the Christian Social Union, is running on a “typical economic conservative program,” Brzeski said.
It includes income and corporate tax cuts, fewer subsidies and less bureaucracy, changes to social benefits, deregulation, support for innovation, start-ups and artificial intelligence and boosting investment among other policies, according to CDU/CSU campaigners.
“The weak parts of the positions are that the CDU/CSU is not very precise on how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” Brzeski said, noting that the union appears to be aiming to revive Germany’s economic model without fully overhauling it.
“It is still a reform program which pretends that change can happen without pain,” he said.
Geraldine Dany-Knedlik, head of forecasting at research institute DIW Berlin, noted that the CDU is also looking to reach gross domestic product growth of around 2% again through its fiscal and economic program called “Agenda 2030.”
But reaching such levels of economic expansion in Germany “seems unrealistic,” not just temporarily, but also in the long run, she told CNBC.
Germany’s GDP declined in both 2023 and 2024. Recent quarterly growth readings have also been teetering on the verge of a technical recession, which has so far been narrowly avoided. The German economy shrank by 0.2% in the fourth quarter, compared with the previous three-month stretch, according to the latest reading.
Europe’s largest economy faces pressure in key industries like the auto sector, issues with infrastructure like the country’s rail network and a housebuilding crisis.
Dany-Knedlik also flagged the so-called debt brake, a long-standing fiscal rule that is enshrined in Germany’s constitution, which limits the size of the structural budget deficit and how much debt the government can take on.
Whether or not the clause should be overhauled has been a big part of the fiscal debate ahead of the election. While the CDU ideally does not want to change the debt brake, Merz has said that he may be open to some reform.
“To increase growth prospects substantially without increasing debt also seems rather unlikely,” DIW’s Dany-Knedlik said, adding that, if public investments were to rise within the limits of the debt brake, significant tax increases would be unavoidable.
“Taking into account that a 2 Percent growth target is to be reached within a 4 year legislation period, the Agenda 2030 in combination with conservatives attitude towards the debt break to me reads more of a wish list than a straight forward economic growth program,” she said.
Franziska Palmas, senior Europe economist at Capital Economics, sees some benefits to the plans of the CDU-CSU union, saying they would likely “be positive” for the economy, but warning that the resulting boost would be small.
“Tax cuts would support consumer spending and private investment, but weak sentiment means consumers may save a significant share of their additional after-tax income and firms may be reluctant to invest,” she told CNBC.
Palmas nevertheless pointed out that not everyone would come away a winner from the new policies. Income tax cuts would benefit middle- and higher-income households more than those with a lower income, who would also be affected by potential reductions of social benefits.
Coalition talks ahead
Following the Sunday election, the CDU/CSU will almost certainly be left to find a coalition partner to form a majority government, with the Social Democratic Party or the Green party emerging as the likeliest candidates.
The parties will need to broker a coalition agreement outlining their joint goals, including on the economy — which could prove to be a difficult undertaking, Capital Economics’ Palmas said.
“The CDU and the SPD and Greens have significantly different economic policy positions,” she said, pointing to discrepancies over taxes and regulation. While the CDU/CSU want to reduce both items, the SPD and Greens seek to raise taxes and oppose deregulation in at least some areas, Palmas explained.
The group is nevertheless likely to hold the power in any potential negotiations as it will likely have their choice between partnering with the SPD or Greens.
“Accordingly, we suspect that the coalition agreement will include most of the CDU’s main economic proposals,” she said.
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