Tuesday, September 13, 2022
The most important economic print ahead of next week’s Fed meeting that decides monetary policy is out this morning, and the relief market participants were looking for did not arrive: +0.1% on headline Consumer Price Index (CPI) for August reverses the -0.1% analysts were expecting, and a tick up from July’s 0.0%. Year-over-year CPI, which has become sort of a shorthand figure for overall inflation, came in at +8.3% — 30 basis points (bps) higher than expected, and even higher than the hoped-for “whisper number” of something with a 7-handle.
We strip out volatile food and gas prices to reach our “core” read on these CPI numbers. This is where the Fed’s focus is likely to be — and it’s not pretty, either: +0.6% core headline CPI is double the consensus and previous month’s +0.3%, while year-over-year core reached +6.3% — 30 bps higher than consensus and even higher than what some investors were hoping for. We are off cycle highs on core headline, which came in at +0.7% in June and +0.9% back in April — and down year over year from June’s +9.1%, which was the highest level in 41 years.
Still, these numbers are disappointing, and pre-market trading reflects this. Immediately ahead of the print, the Dow was +250 points, the Nasdaq +110 and the S&P 500 +35 points. Moments later, we were -320 points on the Dow, -250 on the Nasdaq and -60 points on the S&P. Especially with gasoline and housing prices having come down notably in the past month, we’re not seeing things melt down on the core side (especially food costs) as fast, and while home prices are coming down, owners equivalent rent is not.
Perhaps this is all merely a matter of timing: we’re clearly off the peak inflation metrics of CPI from earlier in this year, and perhaps things like deflation from excess inventory — one thing economists were banking on coming down, which would have helped lower CPI figures — are just taking a little longer to find their way to these monthly prints. The quick view of these numbers this morning is bad: inflation is still going up month over month, not down.
After all, we already knew the Fed was going to crank up interest rates 75 bps a week from tomorrow. This is unlikely to change, although the odds now shift from a 50-75 bps range to a 75-100 bps one, meaning the Fed may feel it needs to do more than 3/4 hikes in the past two meetings because inflation is still not behaving. But even if the Fed does raise a full percentage point — 100 bps — that brings us to 3.25-3.50% on the Fed funds rate, which we knew we were (eventually) going to get to anyway.
If anything, this latest bull run demonstrates that positive sentiment has a way of getting ahead of itself, or at least ahead of the facts. We still may be justified to see equities at the loftier levels they’ve been at over the past week, but not before we fight through the headwinds Fed Chair Powell warned us about a couple weeks ago.
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CPI Doesn't Behave: +0.1%, +8.3% YOY
Tuesday, September 13, 2022
The most important economic print ahead of next week’s Fed meeting that decides monetary policy is out this morning, and the relief market participants were looking for did not arrive: +0.1% on headline Consumer Price Index (CPI) for August reverses the -0.1% analysts were expecting, and a tick up from July’s 0.0%. Year-over-year CPI, which has become sort of a shorthand figure for overall inflation, came in at +8.3% — 30 basis points (bps) higher than expected, and even higher than the hoped-for “whisper number” of something with a 7-handle.
We strip out volatile food and gas prices to reach our “core” read on these CPI numbers. This is where the Fed’s focus is likely to be — and it’s not pretty, either: +0.6% core headline CPI is double the consensus and previous month’s +0.3%, while year-over-year core reached +6.3% — 30 bps higher than consensus and even higher than what some investors were hoping for. We are off cycle highs on core headline, which came in at +0.7% in June and +0.9% back in April — and down year over year from June’s +9.1%, which was the highest level in 41 years.
Still, these numbers are disappointing, and pre-market trading reflects this. Immediately ahead of the print, the Dow was +250 points, the Nasdaq +110 and the S&P 500 +35 points. Moments later, we were -320 points on the Dow, -250 on the Nasdaq and -60 points on the S&P. Especially with gasoline and housing prices having come down notably in the past month, we’re not seeing things melt down on the core side (especially food costs) as fast, and while home prices are coming down, owners equivalent rent is not.
Perhaps this is all merely a matter of timing: we’re clearly off the peak inflation metrics of CPI from earlier in this year, and perhaps things like deflation from excess inventory — one thing economists were banking on coming down, which would have helped lower CPI figures — are just taking a little longer to find their way to these monthly prints. The quick view of these numbers this morning is bad: inflation is still going up month over month, not down.
After all, we already knew the Fed was going to crank up interest rates 75 bps a week from tomorrow. This is unlikely to change, although the odds now shift from a 50-75 bps range to a 75-100 bps one, meaning the Fed may feel it needs to do more than 3/4 hikes in the past two meetings because inflation is still not behaving. But even if the Fed does raise a full percentage point — 100 bps — that brings us to 3.25-3.50% on the Fed funds rate, which we knew we were (eventually) going to get to anyway.
If anything, this latest bull run demonstrates that positive sentiment has a way of getting ahead of itself, or at least ahead of the facts. We still may be justified to see equities at the loftier levels they’ve been at over the past week, but not before we fight through the headwinds Fed Chair Powell warned us about a couple weeks ago.
Questions or comments about this article and/or its author? Click here>>