Weekly Market Upd

Consumer inflation cooled in June, while wholesale inflation surprised to the upside. Plus, Fed Chair Jerome Powell acknowledged that elevated inflation isn’t the only risk to our economy. Read on for these stories and more:

• Consumer Inflation Cooler Than Forecasted

• Wholesale Inflation Heats Up

• Powell Testimony Shows Fed Focused on Dual Mandate

• Holiday Impact on Unemployment Claims

Consumer Inflation Cooler Than Forecasted

There was more encouraging news regarding inflation as June’s Consumer Price Index (CPI) fell 0.1% from May. This marked the first monthly decline since the start of the pandemic and helped push the annual reading lower from 3.3% to 3%. Core CPI, which strips out volatile food and energy prices, increased 0.1% for the month while the annual reading declined from 3.4% to 3.3%. 

All these measures were softer than estimates, as moderating gasoline and shelter costs were key reasons for the friendly numbers.

What’s the bottom line? Remember, the Fed hiked its benchmark Fed Funds Rate eleven times between March 2022 and July 2023 to a two-decade high to fight inflation, which peaked at 9.1% in 2022. Their goal with this series of hikes was to slow borrowing and spending so pricing pressure would shrink and inflation would come under control.

The Fed has repeatedly said that they do not plan to cut rates until members have gained greater confidence that annual inflation is moving sustainably toward their 2 percent target. Fed Chair Jerome Powell reiterated this sentiment last Tuesday and Wednesday during his Semiannual Monetary Policy Report to Congress, which occurred ahead of Thursday’s CPI release (more on his testimony below). 

June’s CPI data followed better than expected numbers in both April and May, giving the Fed another welcome sign that inflationary pressures are easing, especially after readings in the first quarter of this year were unexpectedly high.

Wholesale Inflation Heats Up

The Producer Price Index (PPI), which measures inflation on the wholesale level, was hotter than expected in June while May’s readings were also revised higher. Headline PPI rose 0.2% last month, with the annual reading also up from 2.4% to 2.6%. Core PPI, which strips out volatile food and energy prices, rose 0.4% and the year-over-year reading increased from 2.6% to 3%. 

What’s the bottom line? After June’s cool consumer inflation report, wholesale inflation surprised to the upside. While the PPI report did not move the markets when it was released on Friday, the data is important because some of the components are factored into another inflation measure called Personal Consumption Expenditures (PCE). We will need to see if this causes PCE to be hotter than expected as a result, but thus far expectations are for a low PCE reading when that data is released on July 26.

Powell Testimony Shows Fed Focused on Dual Mandate

While the Fed has a dual mandate of price stability and maximum employment, in recent years they’ve been more focused on taming out-of-control inflation, given that the labor market has been strong. However, in his testimony to Congress last week, Powell acknowledged that “elevated inflation is not the only risk we face,” as the job market has “cooled considerably.”

What’s the bottom line? Powell also noted that economic growth has moderated after a strong expansion in the second half of last year. Cooling consumer inflation combined with signs that the economy and job market are slowing have led to growing calls for the Fed to begin cutting their benchmark Fed Funds Rate, with growing odds that a cut may occur at their meeting on September 17-18. The inflation and labor market reports released ahead of that meeting will play a pivotal role in this decision.

Holiday Impact on Unemployment Claims

Initial Jobless Claims fell by 17,000 in the latest week, with 222,000 people filing new unemployment claims. Continuing Claims also fell by 4,000, as 1.852 million people are still receiving benefits after filing their initial claim.

What’s the bottom line? While Initial Jobless Claims fell to their lowest level since May, the measured week included July 4 and this could have impacted the data as people often put off filing during holiday weeks. 

Continuing Claims measured the week before Independence Day, so they were unaffected by the holiday. These Claims have now topped 1.8 million for the last five weeks, remaining near some of the highest levels seen in recent years and suggesting that it’s becoming harder for people to find a new job once they’re let go.

Again, the Fed will be watching for any sustained rise in unemployment claims as they weigh monetary policy and the timing for rate cuts this year.

What to Look for This Week 

Important housing reports are ahead, starting Tuesday with an update on home builder sentiment for this month. June’s Housing Starts and Building Permits will be reported on Wednesday.

Also of note, June’s Retail Sales will be released on Tuesday and the latest Jobless Claims on Thursday. Plus, we’ll see an update on manufacturing for the New York region on Monday and the Philadelphia region on Thursday.

Technical Picture

Mortgage Bonds closed above an important overhead ceiling on Friday. If this result holds, there is a ton of room to the upside. The 10-year ended last week trading around 4.18%, near the lower end of its current trading range. It is a significant sign to see the 10-year trade beneath 4.25% and if this is maintained, we will likely see yields drift toward 4%.