A downside surprise on estimates for US CPI in the month of July saw the dollar sink alongside bond yields, while equities rallied hard in the immediate reaction. While the greenback was dumpstered and equities ran with gains, bond yields actually recovered somewhat with 10-year Treasury yields erasing the drop from yesterday to keep back at 2.79% currently.
As much as broader markets are looking for a Fed pivot, policymakers aren't pulling back on expectations just yet. For example, Daly suggested she would be supportive of a 50 bps rate hike next month but still sees rates rising to just under 3.50% by year-end. And that doesn't mean that they will pause at that juncture.
It will all depend on macroeconomic developments moving forward with the key being inflation and economic growth conditions. For now, the crest that is showing up in the US CPI data is enough to provide some hope and comfort for markets that the case for a Fed pivot may be growing. That resulted in yesterday's price action, as is the case for the dollar and stocks at least.
So, let's dive a little bit deeper into what the data says and what it might hold for the future outlook on inflation in the US.
The main drag to the report yesterday was energy - this was already well telegraphed going into the report - with energy inflation falling by 4.6% on the month. The drop in gasoline prices is the notable development with energy commodities showing a 7.6% drop in prices in July. That is down from a 10.4% jump in prices in June.
Meanwhile, the easing of supply chains also saw core commodities i.e. goods inflation rise by only 0.2% while shelter prices moderated to a 0.5% increase on the month. These were both lower than that in June at least, seen at 0.8% and 0.6% increases respectively.
The bad news is that food prices were seen up 1.1% last month, marking a seventh consecutive month of an increase of 0.9% or more. In fact, the July reading was the highest since April 2020 and that is arguably a bigger weight on the working-class than other items in the report. The rent index also rose by 0.7% in July and that remains high but this is maybe a little dated as the housing market is already impacted by the Fed's rate hikes.
Anyway, the point here is that it isn't Fed rate hikes that is bringing down inflation. The thing responsible for that is arguably lower energy prices and to some extent, more reopenings and easing of supply chain disruptions. Now, there's still a lot of noise in the data and trying to read the passthrough from higher energy and food prices is extremely difficult.
And if you must note, I'm only focusing on the monthly figures here. We are reaching a point where the annual figures don't really matter anymore - at least in terms of actual insight or material developments. It is something I made mention to back here in June.
Coming back to the report, there's just too much to decipher based on one set of numbers. I would take it that there is some evidence that inflation pressures are easing and yes, it may be caused by declining energy prices for the most part. The core reading continues to be rather sticky, even if there are signs that the surge in price pressures is cooling off slightly. The fact that it sits near 6% means the Fed is still a long way from delivering on its mandate.
In short, it is too soon to be calling this a turning point or a confirmation that a Fed pivot will be coming soon. If anything else, this is just first base. We're going to have to wait until the bases are loaded by getting confirmation from the data in the months ahead before angling for that home run.
But take nothing away from the numbers and markets' constant need to simplify their focus and approach. It is what it is. And this is a start at least.
