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TODAY’S ECONOMIC DATA

Headline Inflation Numbers Softer on Pandemic Categories, Broader Inflation Trend Remains Firm: Consumer prices rose 0.27% MoM at the headline level and 0.10% at the core level in August, both proving softer than economists expected. Looking through the details which have been driving inflation in recent months, the pandemic-related volatility remains a story, as does the broader-based inflation concerns.  Lodging-away-from-home prices plunged 2.9% after jumping 13% in the previous two months.  They remain above pre-pandemic levels.  Airfares fell 9.1% and are now back to 18% below pre-pandemic levels. The ever-volatile auto categories showed a 8.5% drop in auto rentals (still 45% above pre-pandemic levels), a 1.5% decline in used car prices (still up 41% from last March), and new car prices slowing their ascent to gain 1.2% MoM (now up more than 7.5% YoY).  Food prices gains, which have been attracting attention over the past two months, slowed their gains from 0.7% MoM to 0.4%.  Rising rent prices continues to be a concern with owners’ equivalent rent CPI seeing its fourth consecutive monthly gain of 0.3%.  Making up 33% of the headline CPI basket and 41% of the core CPI basket, this is likely to provide a firmer foundation for inflation in coming quarters (see Chart of the Day). Excluding the most volatile categories of inflation which are expected to eventually prove transitory (auto rentals, used cars, lodging, airfare, and apparel), headline CPI rose to 2.9% YoY and core rose to 2.7%, both evidence of broader inflation pressure.

Business Confidence Outlook Discouraging Although Current Assessment Beat Expectations: Small business confidence unexpectedly improved in August, rising from 99.7 to 100.1.  Particularly strong was the planning-to-hire index, rising 5 points to a record-high 32. However, hiring remains a challenge with a net-50% of respondents saying they have been unable to fill job openings.  Those saying inventories are too low remained high and a net-49% of respondents indicated higher selling prices.  While the current assessment was better-than-expected, the future outlook was less rosy. According to the NFIB’s Chief Economist, “small business owners are losing confidence in the strength of future business conditions. … The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions.”

TRADING ACTIVITY

S&P Avoids Six-Day Losing Streak: Stocks were mixed and Treasury yields fell yesterday.  The S&P rose 10 points (+0.2%) to 4,468 ending just the second five-day losing streak of the year.  The Nasdaq pulled back 0.1%.  The Dollar inched higher, crude rose to a six-week high, and aluminum, the latest reflection of the supply chain issues, rose to its highest level in thirteen years.  Despite the growing list of factors adding to inflation pressures, the 10-year Treasury yield again grinded lower, down 1.6bp to 1.328%.

Treasury Yields Swing About as Inflation Prints Softer than Expectations: Foreign equities were mixed Tuesday and U.S. futures were essentially flat overnight after the Dow and S&P 500 broke lengthy losing streaks with modest gains. The prospect for another firm inflation print in this morning’s data likely played a role in equities checking up and is consistent with small increases for Treasury yields. The 10-year yield was 1.5 bps higher at 1.34% before 7 a.m. CT, outstripping a smaller 0.4-bp increase for the 2-year Treasury yield but trailing larger increases in longer European yields. Germany’s 10-year yield had risen 2.5 bps to -0.31%, a high since July 13, while the U.K.’s 10-year yield led nearly all global increases, rising more than 4 bps to a three-month high. Reflecting a story that may sound familiar to U.S. observers, job openings in the U.K. rose to another record in August despite continued declines in unemployment claims, leaving wage growth at surprisingly firm levels. A couple of minutes in front of the U.S. inflation data, the 10-year Treasury yield had added to overnight gains, up 2.0 bps on the day at the session’s high. The 10-year yield immediately and fully erased its daily gain after the topline CPI results printed softer than expected, but quickly recovered higher to trade 1.5 bps higher at 1.34%.

NOTEWORTHY NEWS

Budget Deficit Pulls Back as Stimulus in Rearview Mirror: Treasury’s August Budget Statement showed the monthly deficit declined from $200.0b to $170.6b as outlays continued to normalize following the latest round of stimulus.  Outlays fell 22% MoM, from $564b to $439b, the lowest monthly total of 2021 after peaking at $927b in March.  Revenues were up a more fractional 2.4% MoM, from $262b to $268b.  After hitting $4.1t in March, the trailing 12-month deficit has now fallen to $2.8t but remains at the highest non-pandemic level on record.