Citi: Shifting Balance of Risks from Inflation to Employment
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Key Views
June's unemployment rate decline from 4.3% to 4.2% was driven by an unusual drop in labor force participation; absent this decline, unemployment would have reached 4.6%. Three-month average nonfarm payrolls fell from over 180,000 to 111,000, while continuing jobless claims are rising. Citi forecasts June core CPI at just 0.19% month-over-month, with year-over-year growth falling below 2.5% by August. The BEA's September methodology adjustment could revise recent core PCE down 20–30 basis points.
Outlook
Citi projects Q2 real GDP growth of approximately 1.9% annualized—moderate expansion that neither demands urgent hikes nor emergency cuts. The baseline path forecasts 25-basis-point cuts in October, December, and January 2027, lowering the federal funds rate to 2.75%–3.0%.
Recommended Securities
Citi favors long positions in 2-year US Treasuries or front-end duration, citing the removal of hiking premia and growing acceptance of the rate-cut path. Curve steepening strategies capture the direct support lower policy rates provide to the front end.
Key exhibits
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