Will the Fed signal a rate cut next?

Eurozone inflation unexpectedly rises to 2.6% in July, while the Fed may hint at a possible rate cut amid cooling inflation and a slowing labor market.

By Ahmed Azzam | @3zzamous | 31 July 2024

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  • Eurozone inflation rises to 2.6% in July

  • Fed may hint at potential rate cut amid cooling inflation

Eurozone inflation rate unexpectedly rises

Eurozone inflation defied expectations by rising to 2.6% in July 2024, up from 2.5% in June, according to preliminary estimates. Analysts had forecast a decline to 2.4%. This unexpected increase was primarily driven by higher costs in major economies, despite a slight slowdown in services inflation, which eased to 4% from 4.1%.

The core inflation rate, which excludes volatile food and energy prices, remained unchanged at 2.9%, slightly above the 2.8% forecast. This steadiness in core inflation suggests underlying price pressures remain persistent.

In Germany, inflation edged up to 2.6% from 2.5%, while France saw a similar rise to 2.6% from 2.5%. Italy experienced a significant jump to 1.7% from 0.9%.

Fed to signal rate cut

The Federal Reserve is likely to hold the federal funds rate steady at a 23-year high of 5.25%-5.50% for the eighth consecutive meeting in July 2024. However, policymakers are anticipated to signal a potential rate cut in the coming months, driven by cooling inflation and a slowing labor market.

In June, the annual headline inflation rate fell to 3%, the lowest since June 2023, while the core inflation rate dropped to a three-year low of 3.3%. The Personal Consumption Expenditures (PCE) rate, the Fed’s preferred inflation measure, also decreased to 2.5% from 2.6%, with the core PCE rate steady at 2.6%.

The unemployment rate has reached a high of 4.1%, the highest since 2021, with a deceleration in payroll growth and an increase in layoffs. These indicators point to a potential easing of monetary policy.

The Fed is expected to inch closer to lowering rates by hinting at a possible cut in September. The policy statement may be adjusted to reflect “further progress” on inflation, replacing the term “modest” progress used previously.

US private employment below forecasts

Private businesses in the US added 122,000 workers to their payrolls in July 2024, marking the smallest increase in six months. This follows an upwardly revised 155,000 in June and falls short of the 150,000 forecast. The data indicates a slowdown in job creation as wage growth continues to decelerate.

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