The Market Today

A Bad Day to Host an Economic Call Discussing the Temporary Nature of Inflation

by Craig Dismuke, Dudley Carter


Vining Sparks 3Q Economic Outlook Webinar: (Registration Link) Vining Sparks will host our 3Q Economic Outlook Webinar this morning at 10:00 a.m. CT.

Consumer Inflation Jumps Sharply, Likely Adding to Fed Concern: Consumer inflation was significantly hotter than expected, once again, in June as pandemic issues continued to affect the results, and broader based inflation proved firmer.  Headline consumer inflation rose 0.9% MoM bringing the YoY rate up from 5.0% to 5.4%.  Core CPI also rose 0.9% MoM, bringing the YoY rate up from 3.8% to 4.5%, its fastest rate of gain since 1991. Food prices rose 0.8% MoM which energy prices gained another 1.5%.

Categories Expected to Prove Temporary: Looking at the categories which are expected to eventually prove transitory, new and used car prices once again drove a substantial share of the monthly increase.  Used car prices rose 10.5% MoM, now up 44% from their pre-pandemic level, while new car prices jumped another 2.0% MoM.  Car and truck rentals rose another 5.2%, now up 71% from their pre-pandemic prices.  Airfare prices recovered another 2.7% MoM but remain 9.5% below their pre-pandemic level.  Lodging away from home prices jumped 6.95% MoM and have now fully recovered their lost ground during the pandemic.  Apparel prices were mixed.  These categories of goods and services (new and used autos, auto rentals, airfares, lodging, and apparel) account for 14.9% of the core CPI bucket.  However, they accounted for 65% of core inflation in June.

Broad-Based Inflation Continues to Be Firm, Albeit Not as Exceptional as Headline Figures Suggest: Apart from the categories which are expected to be transitory, the remaining 85% of core items showed firmer broad-based inflation in June also, rising from 2.4% to 2.6% YoY.  However, these remaining categories of prices do not show the kind of shocking price gains seen in the aforementioned categories.  Of particular note, owners equivalent rent inflation rose 0.3% MoM, its firmest reading since April 2019.  Medical care prices fell  0.1% MoM.

Monetary Policy Impact: From the Fed’s perspective, this report is likely to further their belief that inflation has risen more than they anticipated. Insomuch as it does, it could very well hasten the taper discussions. Recall that 13 of 18 Fed officials reported in their June FOMC meeting that they saw the risks to the inflation outlook tilted to the upside versus only five who believed the risks were broadly balanced.  However, given the concentration of price gains in the categories which are expected to eventually prove temporary, an argument will still be able to be made that elevated inflation will be transitory.

Small Business Confidence Improves but Signs of Strains Remain: Small business confidence improved unexpectedly in June, from 99.6 to 102.5, its strongest level since October 2020. Encouragingly, most of the gain was driven by a recovery in general economic expectations from the lowest level since January 2013. Expectations for real sales and actual earnings also improved. Despite those gains, however, there continued to be signs of supply strains. Those saying inventories were “too low” continued to move higher and difficulties finding workers remained elevated, albeit slightly less so than in May. Notably, the number of businesses raising employee wages hit a record high and those planning pay increases in the near future matched the second highest reading in the series’ history.


Stocks and Treasury Yields Rose Monday, Adding to Friday’s Gains That Pushed Equities to Records and Paused a Drop in Yields: Monday was relatively quiet on the news front, with investors awaiting the beginning of earnings seasons and the release of the latest CPI inflation report, both of which occur today. The Dow and S&P 500 both gained 0.4% to start the week, outpacing a smaller 0.2% gain for the Nasdaq. All three closed at a record in consecutive sessions for the first time since January 8. Within the S&P 500 financials companies were the outperformers ahead of earnings from the largest U.S. banks, leading nine of eleven sectors to a daily gain. Energy companies closed lower as oil prices declined. Treasury yields also added to last Friday’s rise which broke up a strong move lower that had unfolded for eight straight days. The daily increase, however, was limited by solid auctions of 3- and 10-year notes. For the day, the 2-year yield rose 1.4 bps to 0.23% while the 10-year yield added 0.5 bps to 1.36%.

Strong Inflation Flattens the Curve: Stocks rose overnight in Asia while investors elsewhere were more hesitant to commit to a position in front of Tuesday’s bank earnings and U.S. inflation update. The MSCI Asia Pacific index gained 0.8%, led by shares in Hong Kong and strength in tech. Europe’s Stoxx 600, however, was hovering around unchanged before 7 a.m. CT and U.S. futures were mixed; the Dow and S&P 500 were essentially flat while the Nasdaq moved up 0.3%. JPMorgan beat revenue and earnings expectations, helped out by strong activity in its investment banking group and a $2.3 billion release of loan loss reserves. Also supported by strong investment banking results, Goldman topped revenue and earnings forecasts. Treasury yields had moved lower before June’s CPI data were posted, with the 10-year yield down 1.9 bps to 1.346% and near its low print of the overnight session. That decline was quickly, but only briefly, unwound as yields jumped to new highs for the day on the hotter-than-expected topline inflation rates. The 10-year yield jumped from 1.343% to 1.380% before falling back to 0.7 bps lower at 7:41 a.m. CT. The 2-year yield held its reversal, up 1.6 bps on the day to 0.243%, a seven-day high.


Kashkari Believes Labor Market Slack Will Keep Strong Inflation from Persisting: Minneapolis Fed President Kashkari gave a high-level explanation Monday for why he won’t yet support a change in the stance of monetary policy. Kashkari, who doesn’t vote on policy again until 2023, said, “It really is the labor market that I think is the most important factor in how much inflation we have on a sustained basis going forward.” Therefore, the 7 to 10 million Americans out of work as a result of the pandemic, according to his estimates, are the key reasons why stronger inflation pressures will dissipate eventually. “I’m in the camp that it’s transitory,” he concluded, referencing high current inflation readings.

Williams Waiting for Substantial Further Progress: New York Fed President Williams acknowledged that the unique nature of the pandemic’s disruptions are making it difficult to discern the underlying trend for inflation, adding that “This is a time of very high uncertainty.” A survey released by the staff of the New York Federal Reserve bank on Monday, unrelated to Williams’s speech, showed a jump in near-term consumer inflation expectations to a record in June, but no change in expectations for a couple of years from now. Williams repeated his assessment that “clearly, right now, we have not achieved” the substantial further progress necessary to begin tapering the Fed’s monthly asset purchases. However, when the threshold is met, and the Fed decides it is appropriate to begin paring back those purchases, Williams hinted that he doesn’t see a need to address MBS purchases differently or earlier than the purchases of Treasuries. “I don’t see them as, one tool is particularly focused on housing and the other not,” Williams said, adding that “Both of them affect interest rates. Therefore both of them affect the cost of housing.”

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