One of the most hawkish investment firms on Wall Street might soon revise its estimates and anticipate an earlier rate cut from the Federal Reserve if June’s new inflation figures confirm another unmistakable signal of a return towards the 2% target.

Despite recent benign inflation reports, Bank of America still maintains its call for rate cuts to begin no earlier than December 2024. This stance, which contrasts sharply with the current market pricing seeing a 76% chance of cuts starting as early as September, may be softened after the upcoming Consumer Price Index (CPI) report on Thursday.

“We expect the June CPI report to be another confidence builder following the undeniably good May report,” wrote economist Michael Gapen in a recent note.

June CPI Projections

Bank of America forecasts the headline CPI to have risen by 0.1% month-over-month, partly due to another drop in energy prices. This would result in the year-over-year rate falling by a tenth to 3.2%.

Analysts expect core CPI to have increased by 0.2% month-over-month.

“While this is not quite as low as May, it would be a good print for the Fed,” Gapen added.

The key driver of the forecasted acceleration in core CPI relative to May is core services excluding rent and owner’s equivalent rent (non-housing services).

This aggregate category surprisingly edged down in May, largely due to a slight decline in motor vehicle insurance. For June, however, increases in motor vehicle insurance and non-housing services are expected.

Non-housing services inflation should moderate over time given cooling services wage inflation; however, a sustained period of deflation is unlikely.

Aside from services, core goods prices are expected to have fallen for a fourth consecutive month, partly due to another decline in new vehicle prices. Inventories of new vehicles continue to climb, leading to greater use of incentives by manufacturers.

Beyond this month, upside risks to core goods through higher shipping costs are seen. However, with demand cooling, it may be harder to pass these costs onto consumers.

Implications for Fed Policy

Should the CPI report print in line with Bank of America’s expectations, the firm would maintain its expectation for the Fed to start its cutting cycle in December.

That said, another 0.2% month-over-month print for core CPI would tilt the risk towards an earlier cut, especially given signs of softening activity.

Analysts Maintain Positive View On Stocks

Bank of America technical analysts continue to hold a bullish view on U.S. equities.

The S&P 500 (SPX), S&P 100 (SP. SP100), NASDAQ 100 and NASDAQ Composite (CCMP) have all soared to new all-time highs in early July, signaling robust market confidence and momentum. However, not all indices are sharing in the celebration. The Russell 2000, as tracked by the iShares Russell 2000 ETF IWM,

Invesco S&P 500 Equal Weight ETF RSP and the SPDR Dow Jones Industrial Average DIA continue to lag, falling short of reaching new peaks.

Even these laggards have constructive absolute chart patterns that support the case for higher highs, but they need to join the SPX at new highs to confirm a healthy summer rally for U.S. equities.

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