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July CPI Cooling: Can Powell ‘Insult’ This Economy?

Wednesday 10 August 2022

There’s only one economic report ahead of today’s opening bell, but it’s a sucker: July consumer price index (CPI). Earnings were released this morning and premarket trading has fired like a cannon – it seems market participants are liking what they’re seeing: Headlines have been pancaked month-over-month: 0.0% vs +0.2% expected as of Happiness well below the +1.3% month-on-month we saw in June. Core CPI last month it was +0.3%, 20 basis points (bps) below estimate of +0.5% and less than half of last month’s +0.7%.

For a little perspective, the June CPI read – which pretty much sealed the deal for the Fed’s second straight 75 basis point rate hike in July – was the highest in the headlines since 2005 and at the core since April of last year. But that’s nothing compared to the year-on-year numbers that are now used as shorthand for overall domestic inflation.

for July, Headline CPI year after year was +8.5%, 20 basis points lower than expected and more than half a point lower than +9.1% in June, the highest level in 41 years. It also marks our lowest level since April of this year, which could indicate that we are now chasing the head of the parabolic curve. Core CPI year after year reached +5.9% in line with June’s level and 20 basis points lower than expected. Long story short: very good news, all around.

Premarket futures exploded shortly after that pressure hit the band: the Dow rose to +440 points from +90 minutes before the release, the Nasdaq rose to +330 from +80 points, and the S&P 500 rose to + from +60 points before the release 75 after. This is clearly the spring-loaded scenario markets were working towards when stocks sold off ahead of these CPI numbers yesterday.

We can now look at the Fed – which does not meet to decide monetary policy (ie raise interest rates) for six weeks – and see a potential 75 basis point slowdown in rate hikes we’ve seen over the past two months . Much will depend on subsequent data, including another August CPI report to be released ahead of the Fed’s next meeting, along with six more weeks of economic data from elsewhere. We are just beginning to analyze interest rate data.

It is also important to consider that instead of a safe downtrend in CPI inflation metrics, we may see another false positive similar to last December’s downtrend. The Russian invasion of Ukraine and China’s self-imposed ongoing Covid shutdowns have tightened the screws on supply chain costs etc., which has directly led to a rise in inflation on a global scale – so much so that wage growth, which has also been resilient since the Great Reopening began, pales in comparison to the inflation data we’ve seen this year.

And it’s not like we can breathe easy just yet: +8.5% inflation still marks a generational high and is more than four times higher than the Fed’s stated optimum of +2%. The core 3-month annualized moving average is +6.8%: This is clearly not a time for the Fed to declare victory over inflation. Additionally, as we see inflation metrics cooling off, we need to look at whether the labor force can maintain its strength over time; We are already seeing a cold wind blowing through the housing market in other economic prints.

So we continue to see these developments as Fed Chairman Jay Powell trying to make this economy Captain Sully. Whether he’ll eventually get inflation under control without triggering a recession is unclear, but the data we’ve seen so far looks like he still has a chance. Later today, Fed Chairmen Evans and Kashkari will speak publicly, likely to reflect on this morning’s CPI numbers.

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