Name: July's CPI Report Provides a Map to Where the Fed and the Market Might Go Next
Uploaded: 2023-08-10T14:43:00Z
Duration: 15 min 45 s
Description: Inflation is once again in focus now that the Fed has announced future decisions will be based entirely on data. The July CPI report will play a major role in what comes next for the market and the economy. Photo: Michael Conroy

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Inflation is once again in focus now that the Fed has announced future decisions will be based entirely on data. The July CPI report will play a major role in what comes next for the market and the economy. Photo: Michael Conroy

https://m.wsj.net/video/20230810/cb9e502c-6df3-4aa3-b638-c69fc5057ede/1/hls/manifest-hd-wifi.m3u8

July's CPI Report Provides a Map to Where the Fed and the Market Might Go Next

Hey everyone. Welcome. Welcome into another edition of "Market Takes". I am your host Dion Rabouin, reporter at the "Wall Street Journal". Today we are unpacking and breaking down the CPI inflation report, the Consumer Price Index. We got a bit of a surprise today, but the market reaction seems to show that investors still not worried about inflation and in fact, maybe we got a little bit of relief. I'll explain all that in just a moment. So today as we look through the CPI Report, we're gonna be talking about what the report showed, how that compared to expectations. We're gonna be taking a look at that market reaction that I just talked to you about, going through kind of how the market viewed this and explaining why, breaking all that down. Of course, we're gonna talk about how this influences the Fed. There is no Fed meeting this month but the Fed will be meeting next month on September 19th and 20th, giving us the decision on the 20th. And we know the Fed is everything when it comes to investing and really when it comes to looking at what's gonna come next to the economy. So we'll break down what this report means for them. We're also gonna talk about the biggest takeaways from the report and what comes next. So let's dive into what the report showed and first thing's first, I wanna put a chart up here on your screen to show you just what we're looking at so you can see what we're talking about. Now, going back, this chart starts in January of 2022 and this goes all the way to that July, 2023 report that we just got. And when you see, you see inflation rising until June, 2022 and then coming down every single month thereafter, until the report we just got today, which was, which showed inflation rising year over year CPI to 3.2% from 3% back in June. So what does that mean? Well, the big picture of the report means that inflation is no longer on that consistent downward decline, you see, just picks up there at the end of the month. The long running theme of lower inflation we had seen for a year is over. However, we were still below expectations, still below forecast. Economists had expected for inflation the deceleration of inflation to slow down, and that's exactly what we saw and we actually saw reversal. One thing I wanna point you to on this chart here is it's as you see the chart just or the, those numbers just going down, down, down consistently and then you see that pick back up there, it's really all about the details. So we are still seeing inflation moving lower it's moving towards that 2% number you see there. But now we've kind of bounced up and we've gone a little bit up and we're moving in a bit of the opposite direction. But the other thing to look out for is those comparisons. So June was only 3%, but that was 3% from the June, 2022 level, which as you can see up there on your screen, that's the highest bar. When you come down that next month, that's lower. And then you see consistently lower bars after that. So as we move forward throughout this year, we are comparing to lower numbers last year, which means as we get higher inflation, maybe in the threes continuing, that doesn't mean that inflation is is not still moving in the right direction. It just moves, it's moving a little, little slower. And we have harder comparisons. We've got lower, lower monthly inflation the previous month than we had the month before. This is all based on, you know, baskets and surveys and forms and you know, multiplication and all that stuff that the Bureau of Labor Statistics does. So it's not, you can't really say inflation was 10 in June, 2022 and now it's 12 in June, 2023 or you know, 15 versus 17. It's a little bit more complex than that, but you can see inflation continuing to move lower. And as we move through some of those lower numbers we'll be comparing to lower numbers and that'll mean that inflation may be a little bit higher. So this chart, again, just illustrating that we have seen inflation continuing to go down and then you saw a reversal of that this month, but it's not a big worry and I think that's part of why we're seeing a reaction from markets that we have. I wanna get into the details just a little bit with you because I think they are important. And the two big things that really caught my eye when I look through the report is energy and food. Those two things that are stripped out of core CPI and we'll talk about that in just a second but when you talk about the index for energy, that's down 12.5% from a year ago. However, it has risen the past two months, month-over-month. So over the last two months you've seen energy costs actually pick up. Anyone who's driving around in a car or truck, doing deliveries, I'm sure you've noticed that when you go to pay at the pump. Fuel oil also roses 3% month-over-month that is a big increase. Usually just see month-over-month increases being 0.1, 0.2, 0.3, you know, maybe even 0.5 if it's really high. But 3% month-over-month, that's a big increase and that's heating oil and diesel fuel. So those things go to the utilities that you're paying at your house, the utilities that those stores are paying and that could see, we could see as they have to pay more for delivery, more for heating and cooling of their stores that they could pass those costs on to consumers, that could push inflation higher. Certainly something worth watching. But overall the fuel oil index is down 26% from last year, actually 26.5% from a year ago. So still down, but you are seeing if you look into the month-over-month trend, a pickup and a pretty substantial pickup, definitely keep your eye on that. Food prices continue to rise, up 5% year-over-year. One of the few things that is still consistently rising when you look compared to a year ago and remember how high we were in June a year ago, boom, we are still talking about food prices rising 5%. June and July were big months for food and energy inflation, and we are still seeing energy and food inflation pushing that number up. That's something to watch out for because it doesn't seem like those prices are going down. Now let's strip out food and energy, because those can be very volatile and let's check out the core CPI. I wanna put a chart up here on your screen that shows you what we're looking at when we talk about the core CPI metric. That's moving in in largely the same pattern. You see it moving lower, but at a much slower pace and it's much higher. Remember, when we were looking at CPI overall that's down around 3.2% for July. Well this is still up at 4.7%. So core CPI, excluding food and energy showing inflation still right around 5% at 4.7% down a little bit from 4.8% and a little bit below expectations, but that chart is still much higher than overall inflation. That's something the Fed's gotta keep their eye on. And this chart really just illustrating that CPI in the core when you strip out food and energy, is staying pretty high. And you've got those metrics, like I said, food and energy that are pushing up overall inflation. They're actually pushing it down on a year-over-year basis but month-over-month we're seeing those start to pick up and rise a little bit. So definitely something to keep your eye on. Certainly the Fed will be watching and has watching and is thinking about this right now. The big question is does soft landing summer continue? And if you look out at the markets, we're gonna talk about that in just a second. It looks like it does. This report showed again the theme of decelerating inflation every month. It's lower, lower, lower, that's over, and that's probably gonna be over for a little while. But that was expected. Markets had predicted that that was going to happen and that really was priced in I think. One thing I wanna read you from the BLS report, from the, the CPI report this morning quote, "The index for shelter was by far the largest contributor to monthly all to the monthly all items index accounting for over 90% of the increase." So what does that mean? Listen, rent prices, we've seen them coming down on our real-time metrics, but on the CPI, rent is not coming down, shelter costs are not coming down. We've seen those home prices continue to stay elevated and we are not seeing those prices come down in the CPI. If that does, you could see a real move down in inflation. But we're in July at this point. Well, we're in August, but we're looking at data from July at this point and it's still not showing shelter declining and in fact it's showing shelter picking up and doing 90% of the lift of overall inflation. That's a big deal and something that you want to keep your eye on. There had been expectations that the shelter prices were going to move lower this year. They have not. They have been stubbornly high and that's continued all year long. Let's another chart up here on your screen. Actually, let's look at the markets right now. No more charts. Let's take a look at what's going on in the markets and what we're seeing overall investors are responding to and how they're responding to this report. So you got the NASDAQ up here on your screen. I wanted to show you this three month chart so you can see what we've been seeing going on. Across the board, we're seeing the DOW, the S&P 500 the NASDAQ all moving higher this morning off this report. Really investors are pretty bullish about this. It was higher than it had been the previous month, but lower than expectations and still around that three handle that I think a lot of investors and economists really think the Fed is okay with. That if inflation sits around 3%, they won't have to raise rates. But let's check out the NASDAQ and I wanna show you what the market's been thinking. We hit this nice peak here around the end of July and then we have just been coming down. There's been a lot of worry that maybe a little bit too much excitement was priced in the market. Maybe a little too much good news. But today we are seeing a reversal of that trend lower that we had seen for most of August. And and stock prices are back on the move higher, especially the NASDAQ. NASDAQ up 1% as we said here this morning. So this, the market reaction really just illustrating that this was a case of maybe investors thinking, oh, there might be some bad news coming. Their inflation might be higher than expected if it picks back up. That's bad news. Well, we got the report it did pick back up, but overall not worrisome. And I think that's seeing, that's inspiring some of the bullishness you're seeing with that green all across your screen there. Listen, let's talk about the Fed decision, how this affects that. Fed chair Jerome Powell has said very clearly that inflation is too high, that the Fed will not accept 3% inflation, they want 2% inflation. But a lot of folks out there, they don't really believe that. 3.2% year-over-year inflation, that's something they think the Fed can live with, they think the market can live with and it's not going to force them to raise rates. As we look out at Fed funds futures we're seeing the market expects that the Fed is not going to raise rates at its September meeting about 90% certainty that the Fed will not be raising rates at its meeting next month based on this report. Those are up just a little bit, market priced in about an 85% chance the Fed wouldn't raise rates. So market just saying, okay, we got the CPI report, it's a little more likely the Fed is gonna hold pat, they're not gonna do anything. We don't have to see them reigniting this rate hiking cycle that's got rates at about 5% or a little over 5%, 5.25% right now. When we talk about what the Fed is doing, well, they're now data dependent. And this data, this inflation data, CPI and PCE are the two biggest pieces of inflation. You know, you can talk about jobs, we can talk about retail sales, all those things, but really it's all about inflation. And whether inflation continues to decline towards their 2% target, it didn't this month. It's unlikely I think that it will next month. But if the Fed, if interest rates are still holding at 5.25%, if the Fed holds them there, if inflation stays around this 3%, it's a question of, okay, at what point does the Fed say we're good with that? And the market is betting the Fed actually is good and okay with 3% inflation, hoping that it will kind of start to decline into the end of the year and maybe next year. But right now, markets, investors are betting that the Fed's not going to respond to this with significant or any kind of policy action in terms of a rate increase. Fed is looking to see in clear signs of inflation back towards 2%, but that's towards 2%, not at 2%. That's big. The Super Core Inflation metric is still showing inflation picking back up just like it did on overall inflation. Those services prices are still rising, but it's not a big issue. We're seeing a lot of that increase again in shelter, in gas and in food. And those aren't things that the Fed's rate hikes are necessarily designed to control. So this is definitely a big question mark about what they'll do, but right now not looking like they're gonna have to take significant action. Let's actually, as we're talking about the Fed, throw a chart up here of the Fed's balance sheet in terms of what they're holding. And I wanna put this up here on your screen so you can see that we are very much in the place where the Fed is not adding more to its balance sheet. We see, as you see that line go up and get higher, that means the Fed is pushing more money out into the economy. When you see it go lower, it means the Fed is pulling money outta the economy. So we are very clearly now, you see that blip there? That's in March when we had the Banking crisis and the Fed had to push more money out to get the bank's liquidity and make sure that they were stable insofar as they could. We have gone now lower than that and we are back on this quantitative tightening trajectory, which basically just means the Fed is pulling that money outta the economy. When the money comes outta the economy, it's harder to support stock prices moving up, especially when it's a lot of folks thinking, okay, these companies are going to be worth more but their earnings aren't showing us that they're making more. And that's what we've seen through earning season thus far, is declines in earnings, lower earnings overall. And actually we are on pace to see the lowest earnings we've seen in about three years. But what we're talking about in terms of this chart here is that the Fed is pulling money outta the economy. And that's one thing you're gonna want to keep your eye on is what happens to the stock market and what happens to businesses as the Fed pulls money outta the economy makes it tougher for businesses to grow and sustain. And again, this chart just illustrating, like I said, that theme of quantitative tightening, pulling money out of the economy. Just wanted to make sure that you gotta look at what we were having there. Let's talk about the biggest takeaways. The big picture for the markets is that inflation is no longer going in a straight line down, but it isn't jumping higher either. A little pickup staying around 3% that's nothing to worry about. Today's report is not a sign for the market that the Fed will have to jump back into action immediately. Folks saying, hey, you know what? We think they're gonna stand pat, they're not gonna move. But this is not anything to cheer about in terms of inflation. The Fed wants it at 2%. It's very clearly at three, looks like it may be stuck there for a while. The importance on the economy for regular folks like you and me is you can start to see things like food and gas creeping up higher. You're starting to see those prices and that's getting into the data. Even though prices are down from where they were last year, it looks like as we go through 2023, those prices are starting to pick back up and that's definitely something that you'll wanna watch out for on your morning commute and just in terms of what you're paying in your household budget. Also something the Fed will be watching out for because again, they don't have much say over those food and those energy prices and that's why they watch Core and that's staying pretty elevated as well. Most surprising takeaway is that more than halfway through the year, shelter costs, still not declining. We are still seeing rent home prices, all of those things holding high and doing the big heavy lifting in terms of pushing inflation higher. So listen, that's the big picture of what we're looking at and what the Federal Reserve is looking at. But right now the market is saying, hey, we think overall this is not bad news and not bad news is enough to get us back in that bullish spirit. And that's why we saw the markets moving higher after the report. Remains to be seen if some big investors start to say, hey, you know what, this doesn't really get us excited about what goes on the market, moves back lower, the stock market in particular. That'll be something to definitely watch out for. So what comes next? We have the PPI report, the Producer Price Index, AKA what businesses are paying or wholesale prices, that comes out on Friday, that's tomorrow this week. Next week is retail sales. We'll be right here at "Market Takes", breaking down that report for you. We've also got Walmart earnings next week. We are gonna explain all of that on Monday and tell you about what's coming this week. Listen, I am Dion Rabouin, reporter at "The Wall Street Journal". That's gonna do it for this edition of "Market Takes", but I appreciate you being with me. I know you could have been anywhere in the world but you were here with me and I appreciate that. We hope you'll come back and do it with us when we're right here on 'Market Takes" next time.