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July CPI Cools: Can Powell "Captain Sully" This Economy?

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Wednesday, August 10, 2022

There is only one economic report out ahead of today’s opening bell, but it’s a doozy: July’s Consumer Price Index (CPI). Results are out this morning, and pre-market trading has shot like a cannon — apparently market participants like what they see: headline month over month came in flat as a pancake: 0.0% versus +0.2% expected, thankfully well off the +1.3% month over month we saw in June. Core CPI last month came in at +0.3%, 20 basis points (bps) lower than the +0.5% estimate and less than half the +0.7% last month.

For a little perspective, the June CPI numbers — which pretty much sealed the deal for the Fed’s second-straight 75 bps interest rate hike in July — were the highest since 2005 on headline, and since April of last year on core. But these are nothing compared to the year-over-year figures, which is nowadays used as shorthand for domestic inflation overall.

For July, headline CPI year over year came in at +8.5%, 20 bps lower than expected and more than half a point lower than June’s +9.1%, which was the highest print in 41 years. It also marks our lowest level since April of this year, which may suggest we can now trace the head of the parabolic curve. Core CPI year over year reached +5.9%, equaling the June read and 20 bps lower than expected. Long story short: very good news, all around.

Pre-market futures blasted off moments after this print hit the tape: the Dow went from +90 points prior to +440 points minutes afterward, the Nasdaq went from +80 points to +330, and the S&P 500 grew from +60 points before the release to +75 after. Clearly this is the spring-loaded scenario markets had been working toward when equities sold off yesterday ahead of these CPI numbers.

We can now look at the Fed — which does not meet to decide monetary policy (i.e. raising interest rates) for six weeks — and see a potential weakening in the 75 bps rate hikes we’ve seen the past two months. Much will depend on subsequent data, including another CPI report for August coming out prior to the Fed’s next meeting, along with another six weeks’ worth of economic reads from elsewhere. We’re only getting started analyzing interest-rate-impacted data.

Also important to consider is that instead of a sure-fire downward trajectory on CPI inflation metrics, we may be seeing another false positive, a la last December’s tick down. The Russian invasion of Ukraine and China’s self-imposed rolling Covid-shutdowns tightened the screws on supply chain costs, etc., which directly led to the spike in inflation on a global scale — so much so that wage growth, which has also been robust since the start of the Great Reopening, pales in comparison from the inflation data we've seen this year.

And it’s not like we can breathe a full sigh of relief just yet: +8.5% inflation still represents a multi-generational high, and more than 4x higher than the Fed’s stated optimum +2%. The three-month, annualized moving average on core is +6.8%: this clearly is no time for the Fed to declare victory over inflation. Further, when we see inflation metrics cool off, we need to take a look at if the labor force can retain its strength over time; we already see in other economic prints a cold wind blowing through the Housing market.

Thus, we continue to see these developments as Fed Chair Jay Powell trying to “Captain Sully” this economy. The jury is out whether he’ll eventually bring inflation under control without ushering in a recession, but the data we’ve seen so far looks like he’s still got a shot. Later today, Fed Presidents Evans and Kashkari will speak publicly, likely to reflect on this morning’s CPI numbers.

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