TEST: Tomorrow’ July US inflation report is a key market test. After 12-months of falls headline inflation may start rising. Whilst temporary, driven by commodities and tough base comparisons, it may dent the goldilocks narrative of ever lower inflation and interest rate cuts on the horizon. Better news should come from the more important core inflation, seen stable at 4.8% with a clearer trend of easing shelter and jobs pressures. Inflation remains the most important number in today’s markets and this mixed message part of the recipe for a more volatile summer. But we see underlying price pressure easing, and any market weakness should be, and will be, bought.
INFLATION: The Cleveland Fed NOWCast see’s headline US inflation rising from last month’s downside 3.0% surprise to 3.4% now and then up again to 3.9% in August. With core inflation seen rising slightly now to 4.9% before easing to 4.7% next month. We expect oil prices to self-correct, as any higher prices would drive concerns on tighter monetary policy and a bigger demand slowdown. Whilst shelter costs, that make up over a third of core inflation, are seeing sharply lower rental growth, and even the Fed thinks they could turn negative going forward.
TRACKER: 7 of our 13 inflation metrics have stopped falling (see chart). Supply chains and container rates firmed at low levels, but China’s recent trade weakness shows few pressures. Gasoline and commodities have bounced with supply tight and less-bad demand. This has filtered into market inflation expectations. Better is the big deceleration in housing rents, ISM prices paid, and jobs pressure. The median indicator was flat vs May and 33% off peak. We track 6 segments: labour (employment ISM, JOLTS), housing (Zillow rent, NAHB index), goods (Used cars, Manufacturing ISM prices), commodities (Gasoline, broad commodities), supply chains (GSCP index, container rates), inflation expectations (Michigan survey, Break-evens).
All data, figures & charts are valid as of 07/08/2023