Interpreting the shifts in the Summary of Economic Projections, published with the June FOMC meeting, is tricky, as the latest CPI print came at the same time. Taking the Fed and the latest data into consideration, calibrated cuts (we maintain our view of 50bps of cuts in 2024) still appears to be the most likely scenario. To be sure, the dotplot is ostensibly hawkish, pencilling a median of just 25bps cut for the year compared to 75bps in March and the widely expected 50bps. This can probably be attributed to the shift higher in core PCE projections. Note that the unemployment rate is also kept at 4% this year, suggesting that the Fed does not see upside from current levels.
We are not as convinced and caution against taking the Fed's projections at face value. First, the latest CPI print is benign but may have come too late for changes to be made in the SEP. Headline and core CPI both came in at 0.0% MoM and 0.3% MoM respectively in May, about 10bps below consensus estimates in both cases. More importantly, core services less housing prices actually fell by 0.04% MoM, the first contraction since 2021. A couple more benign CPI prints would be sufficient to tilt the Fed towards a 3Q cut. Moreover, the FOMC statement did acknowledge "modest further progress" towards their inflation goal, which may be the best way to give a nod to the latest CPI figures given time constraints. Second, the grind higher in unemployment rate to 4%, from a low of 3.6% bears watching. The divergence between the establishment and household surveys is large with NFP averaging 200k more jobs created per month. Further upticks in the unemployment rate would probably draw more scrutiny from the Fed.
Further out, we note that the total number of cuts out to 2026 remains the same (9 cuts) but nudged up the long run estimate to 2.8% (2.6% previously).
The UST curve (2Y/10Y) bull steepened in response to the low CPI print but pared gains and re-flattened post FOMC decision. We think lower rates is an appropriate reaction and the front-end pricing of two cuts this year is about right. The belly outperformed as these tenors side stepped the hawkish dot for 2024. Meanwhile, we caution against chasing the UST rally too far. Calibrated cuts is still the most likely scenario and there is a need to shift attention towards the US elections in 2H, which could spur larger term premiums.
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