CPI Cools but US Market didn't Rallies. Why?
Party & Celebration.
Is it too soon to pop the champagne?
A milder Consumer Price Index (CPI) inflation reading released on Wed, 14 Aug 2024 — removes one of the last hurdles the Fed needed to clear before cutting rates in September 2024. (see below)
US July 2024 CPI.
For July 2024, the CPI index increased +2.9% YoY; down from June's +3% annual gain in prices.
On "core" basis (excludes the volatile costs of food and gas), July prices climbed +3.2% YoY, down from 3.3% in June and the smallest increase since April 2021.
According to $Citigroup(C)$, Global Chief Economist, Nathan Sheets :
He thinks July CPI report is a green light for the Fed in September.
The new numbers are the latest confirmation that inflation is cooling, after heating back up during Q1 2024.
That was when, the Fed warned that rates would likely stay higher for longer.
Fed Chair, Mr Jerome Powell made it clear that a cut in September was “on the table” as long as data supported it.
He and other policymakers have said they want to be sure that inflation is really moving “sustainably” down to their 2% goal.
CME Predictions - latest.
$JPMorgan Chase(JPM)$, Global Fixed income, Portfolio manager - Kelsey Berro added:
She does not think there's any debate that the Fed is cutting in September.
What is being debated though is whether it will be a 25 or 50 basis point rate cut.
Traders are currently betting there is a 100% chance of some type of cut in September.
The odds of a 50 basis point cut or a 25 basis point cut are now split roughly 40/60, per the CME FedWatch Tool. (see above)
The swing between the two more plausible interest rate cuts have going on for a while now.
Will it settle down when the Fed convenes for its next meeting ? Don’t think so!
Two Other Catalysts?
The Fed will still have two more important datasets to consider before its Washington D.C. FOMC meeting on Sep 17-18.
The “two” catalysts are:
Core Personal Consumption Expenditures (PCE) index, on 30 Aug 2024, the Fed’s preferred inflation gauge.
US August 2024 Non-farm payroll (NFP) report from the Bureau of Labor Statistics on 6 Sep 2024.
The jobs data will likely help the Fed to decide whether its first interest cut will be small or larger.
Lest we forget.
It was the July 2024 NFP report that caused US market to “tumble” because of the followings:
A “cooler than cool” results of 114K jobs created vs 175K jobs expected .
Doubts and fears that the Fed might have kept interest elevated for too long, affecting the economy.
Rise of US unemployment rate to 4.3% (its highest since October 2021).
Many arguments have surfaced with some Fed watchers:
Arguing that the Fed should have decided at its July meeting to lower rates for the first time, in 4 years to get ahead of a slowing US economy before it tips into a recession.
Those criticisms became louder last week amid the worst one-day rout for the stock market since 2022.
Others have said the Fed is where it needs to be.
On Tue, 13 Aug 2024, a day before the CPI report was released- Fed member Raphael Bostic, said he wants to see "a little more data" before cutting rates. (see above)
He wants to make sure the Fed does not cut rates too soon and risk a re-acceleration of inflation, at the same time, ensuring the job market does not turn "freezing cold."
And rightly so because the FOMC members have been entrusted to do their job; not any other person/s out there.
Why Didn’t Prices Drop Faster ?
One of the most search question is “why didn’t US inflation falls faster” ?
Well, it is because there are several sectors where inflation remains stubbornly sticky. (see above)
“Shelter” happened to be stalling inflation from falling below the 2% mark. (see above & below)
US Bureau of Labor Statistics (BLS) Wednesday’s data showed that shelter costs ticked up +0.4% MoM in July 2024, higher than June's 0.2% rise.
Housing inflation accounted for nearly 90% of the monthly increase in July CPI. (see below)
ClearBridge Investments, Strategy analyst Josh Jamner said that :
Shelter inflation is likely to continue to fade given its well-understood lags.
This would likely lead to a continuation of disinflationary trends in the coming months for headline inflation measures.
For July 2024, shelter costs increased +5.1% YoY, vs the lower than June’s 5.2% annual increase and a peak of 8.2% in March 2023.
On a more “official” note, researchers at the Federal Reserve Bank of Minneapolis expect:
Shelter inflation to remain elevated for the rest of this year and in 2025.
Their model projects shelter inflation to reach +4.8% YoY in December 2024. and stay above pre-pandemic levels through the end of the year in 2025.
US Market didn’t Fly on Wednesday - Why ?
I was full of hope when US July CPI data was released, assuming that US market will begin its recovery track and fast !
But it did not happen. Why ?
Below are some possible explanations.
(1) Already Priced In.
The market had been anticipating a decline in inflation for some time. Latest data was generally in line with expectations, so the “Wow” factor is largely absent.
(2) Market Expectations.
Although CPI data largely met market expectations, there wasn’t a significant surprise to drive a strong market reaction.
(3) Federal Reserve’s Stance.
Although the data supports the possibility of future rate cuts, the Fed has not committed to a specific timeline or pace for these cuts, tempering market enthusiasm, now and then.
(4) Sector-Specific Concerns.
Increases in shelter costs and motor vehicle insurance, accounted for a significant portion of the CPI rise, have dampened the overall positive sentiment.
(5) Lagging Indicator.
CPI is a lagging indicator.
It reflects past economic conditions.
Often, investors are more focused on forward-looking data, ie Retail sales, Industrial production, and Employment numbers
(6) Profit-Taking.
After a period of strong market performance, some investors might have taken profits, leading to a more subdued market reaction.
(7) US Economic Growth.
Although inflation is cooling, concerns about economic growth persist.
A potential recession or slowdown could offset the positive impact of lower inflation.
This was the underlying catalyst that caused US market to falter in end July / early August.
Overall, the positive inflation data was not enough to spark an extreme market reaction due to the above factors.
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