Base Rates

CPI Print Came in slightly lower than expected, But BASE RATES MATTER

Hi Everyone đź‘‹,

It’s back to our regularly scheduled programming with inflation!

Now that we’re through most of earnings, all eyes turned back to CPI last week. Everyone is wondering what’s next for the Fed.

While the Fed favors core PCE as a price level gauge, CPI gives us a look into how price trends are evolving.

The headline number is not that shocking. Remember though, we’re one month removed from the anniversary of the highest inflation figured clocked in the last four decades.

For year-over-year figures, there’s more than meets the eye.

This week, we cover…

  • Heading Into the Print👉 Tech’s YTD Rally, Interest Rates, Commodity Prices

  • By the Numbers 👉 Breaking Down Components

  • The Fed’s Roadmap 👉 Recalibrating targets, remaining “data dependent”

Let’s get started!

1. Heading Into the Print👉 Tech’s YTD Rally, Interest Rates, Commodity Prices

By now, we’re all well aware how good the year has been for Tech. AI fueled a frenzied run, paired with optimism around the potential end of a rate-hiking cycle.

We’ve also had an AI vs. interest rates story. One would have thought based on 2022’s Tech wreck, higher interest rates = lower stock prices for long-duration assets.

Here is a pretty damn good chart that shows this story. The white line is the US 10YR and the yellow line is the inverted QQQ Index:

Source: Bloomberg

That’s a pretty tight correlation…

Now let’s look at this chart in 2023.

Source: Bloomberg

The opposite has materialized in recent months. Tech is rallying despite the move in the 10yr.

With so many opposing forces whipping stock prices around, investors are trying to square what rate moves mean for the market. As Tech eats up more of the market’s total market cap, this is a chart to keep your eye on to see how money may start to move around.

I’ll get more into this in the section below, but an honorable mention to recent moves in energy prices.

If we look at WTI, it has broken out of the sideways/downtrends we’ve seen over the last 12 months.

Since a large portion of the headline inflation print can be attributable to energy, this should also be a chart on investor’s radar. As energy moves up, Core may become the default inflation measure.

Despite this recent rally, you can’t forget about base rates. Year-over-year changes and month-over-month changes tell a very different picture depending on the base of measurement.

With this setup in mind, let’s get into the print.

2. By the Numbers 👉 Breaking Down Components

July CPI came in at 3.2% YoY (+0.2% MoM), slightly below expectations of 3.3%.

Source: Bloomberg

This was the first uptick since the peak of 9.1% last June, and many wondered what drove the changes.

Source: Bureau of Labour Statistics [1]

Notable increases were MoM changes in food and energy.

Food +0.2% MoM indicated some stability, despite still being up 4.9% YoY. Energy contributed a modest 0.1% MoM increase. WTI made a comeback, but energy prices remain down 12.5% YoY.

This is why base rates are important. YoY inflation is declining, but they are still increasing from the higher base of the year prior. Investors seemed unfazed and focused on the rate of change vs the compounding effects.

Turning to Core, figures increased 0.2% MoM, indicating a 2nd straight month of softening.

Rent however, posted solid monthly gains. Tenants’ rent rose 0.42% in July and owners’ equivalent rent (OER) increased 0.49%.

Despite this, many CPI components looked softer. Prices declined for used vehicles (-1.3%), new vehicles (-0.1%), public transportation (-6.3%), lodging (-0.3%), and medical care (-0.2%).

Core goods declined 0.3% in July. Core services rose 0.3%. The so-called “supercore” (meaning core services ex. rent) rose 0.2%.

Overall, the print was a little less exciting than in June. Everyone went all aboard the disinflation train then. Expect more uncertainty.

PPI also hit the tape on Friday. Headline figures rose +0.3% in July, which translates to a +0.8% YoY gain from +0.2% in June. Core PPI was higher than expected too. It came in slightly above expectations at 2.4% vs 2.3%.

We’ve got PPI telling a slightly different story than CPI with a hotter print.

3. The Fed’s Roadmap 👉 Recalibrating targets, remaining “data dependent”

I always like checking rate change expectations before and after critical event dates. Here, we have them the day before and after the print.

Source: Bloomberg,

Here is the same chart the day after:

Source: Bloomberg,

No real fireworks on a change in expectations.

The Fed is always talkin’ “data dependent”, so we also have to zoom out at times.

CPI, hourly earnings, and jobless claims combined to create a dovish signal for the markets. The disinflation story continues, but it wasn’t enough to remove the uncertainty.

The next event to mark on your calendar is Jackson Hole (August 24-26). It sent markets for a wild ride on the back of Fed comments last year.

Will we also get a “hawkish skip” at the Sept meeting? While CPI did come in soft, it looks like it wasn’t quite dovish enough to push markets back to near-term highs just yet.

Bulls are looking for the end of the year to show improving earnings as the economy continues to grow without massive inflation, despite higher rates.

Wrapping Up…

As the tug of war between rates and a stubborn bull market continues, it looks like the only certainty is uncertainty.

In a stock pickers market, choose your fighter wisely.

Until next time. Always Yours. Incessantly Chasing ROI.

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