U.S. Consumer Price Index data for the month of July was released this morning and it was Rip-Van-Winkle exciting. Headline CPI month over month (MoM) came in as expected at +0.2% versus June’s increase of +0.1%. The core MoM rate, ex-food, and energy was up +0.2%, on expectations and matching last month. The more important year over year (YoY) figures were slightly more exciting; the headline was +2.9%, matching expectations and June’s rise, but the core came in at +2.4%. This figure was +0.1% higher than expectations and last month’s core YoY. To summarize, there was one surprise and that surprise was a higher than expected YoY core rate, but looking deeper, we find the balancing factors. Real average weekly earnings YoY rose an anemic +0.1% versus June’s +0.5 %, but real average hourly earnings YoY fell -0.2% versus last month’s unchanged reading. Slight Inflation without wage pressures means stable to falling prices in the near future.
The Fed Can Breathe
This data allows the U.S. Fed to talk either side of the inflation conversation. This is very important leeway, given the uncertainty of the global trade and tariff backdrop. Dow futures were -115 points just prior to the number being released and then post CPI, recovered about 25 points of that early loss (as I write, Dow futures are back down -141), showing the market's view of tame prices. The Yield curve which was as follows on Aug. 1st; 10’s – 2’s @ 33 basis points (bps) and 30’s – 2’s @ 46bps had flattened at the close yesterday to 29bps and 44bps respectively, flattened even further post CPI to 27 bps and 41bps. This also shows the market view of 2 more FOMC rate hikes in the pipeline and stable to falling long-term inflation. The Fed doesn’t love this situation, but it leaves some runway for them to back down from rate hikes if the economy slows due to the trade climate or to be ahead of the curve if tariff-induce inflation is in the economy’s future. Neither situation is ideal for policymakers of the Dow, S&P, and Nasdaq, but it’s always good to have options.