Good Wednesday AM,
Yes, finally a reprieve in the markets.
Today is CPI day and the print was weak. The all-important CPI data was bound at some time to show what we all inherently know, inflation is moderating. Bonds are having a strong and positive reaction. The 10yr is at 3.84% and down 25bps this week already, with mortgage bonds +60bps. We are back to the first level of Fibonacci, which is the 23% level. Now, whether it bounces and stays in this range or comes down into the next range remains to be seen. If we can close below 3.90 on the ten year (which right now, it looks like we will), we are likely to test 3.67 which is the next line (38% Fibonacci). That is an old level that we tested a million times over the last two months. Tomorrow, we have PPI. So that could sort of undo the party if it comes in stronger than expected. I don’t want to say it too loudly and anger the bond gods so will just say, while it is unlikely that data comes in strong, be ready as that could happen. Fingers and toes are crossed.
Some interesting takeaways on CPI and inflation below. The piece regarding a different methodology here vs Europe in calculating CPI, raises my eyebrow (I guess I have one). Accounting should be accounting and a science, not art. Manipulating data irks me.
Inflation is cooling.
As always with the report, people will slice it in a bunch of different ways. Supercore inflation. Core inflation ex-shelter. You name it.
I liked this chart from Guy Berger of LinkedIn, showing a pronounced cooling for the Cleveland Fed’s Trimmed Mean CPI, which basically attempts to lop off outliers on both ends. There’s always noise, but hopefully this trend continues.
If core inflation came in just below 3%, the Federal Reserve would breathe a huge sigh of relief, stocks would head to the races and consumers could relax about the rising cost of living. It isn’t merely a dream: Measure U.S. price changes the way Europe does, and inflation was already there in May. Measure them as the U.S. does, and on Wednesday new figures are predicted by economists to show core inflation far higher, at 5% for June, James Mackintosh writes.
The U.S. and Europe use different methods to calculate inflation data.
U.S. core inflation—which excludes volatile food and energy—measured using the standard consumer-price index was 2.3 percentage points higher than the European-style inflation, known as the harmonized index of consumer prices. It is the biggest gap there has ever been.
Europe’s measure, known as HICP, doesn’t include the imaginary cost of what a homeowner would pay to rent their house, which makes up about a third of the U.S. core CPI. Known as “owners’ equivalent rent” or imputed rent, the measure has long had its critics. Exclude something that no one actually pays and core inflation’s looking basically fine.
Please remain safe and stay healthy, make today great!