Did June PPI Match CPI’s Cooling Theme?

• The cooler-than-expected June CPI rallied Treasuries yesterday, but there was a bit of hesitancy to run with it as the report had enough head-scratching results that the July CPI report (due 8/12) has already been circled to verify or deny the June results. We discuss more of the June results below, but it has dashed most odds of a possible July rate hike, and the odds of a September hike have decreased as well. Before the report, odds for September were around 70%, and now those odds are 61%.  The other big news was the Kevin Warsh testimony in front of the House Financial Services Committee. Warsh led with his now familiar inflation-fighting theme, but the June CPI took some of the urgency of that message down a notch or two. He’ll be in front of the Senate Banking Committee today, so expect a few more headlines to arise. Meanwhile, wholesale inflation numbers for June were released this morning (and which we discuss below) and that along with Friday’s Import/Export Price Report will give analysts enough data to refine their PCE inflation estimates due on July 30. Currently, the 10yr is yielding 4.46%, down 1bp, while the 2yr is yielding 3.99%, also down 1bp on the day.

 

• Yesterday’s June CPI was well below expectations as a decrease in energy costs and moderation in just about every other area led to the largest monthly headline decrease since April 2020. Overall inflation decreased -0.4%, well below the -0.1% expectation with the YoY rate decreasing from 4.2% to 3.5% vs. 3.8% expected.  Energy costs decreased -5.7% (the biggest drop since April 2020) with gasoline down 9.7%. Despite endless complaints from consumers, and the demand from new AI data centers, electricity fell -1.0% MoM which is one of the peculiarities from the report. Food was docile as well, increasing 0.2% for the second straight month after popping 0.5% in April. Thus, the bleed through from energy costs that looked to be happening in March and April was nonexistent for the second straight month. That said, the rebound in energy prices this month could challenge expectations for further improvement in coming months.

 

• Core CPI was unchanged (-0.0017% unrounded) MoM, which was below the 0.2% expectation and May’s 0.2% result. That dip led to the YoY rate decreasing from 2.9% to 2.6%, two-tenths less than expected. Just as in the headline result, the areas that had been a cause for concern, and “sticky” to the upside were much better behaved in June. Shelter costs rose just 0.1%, the smallest increase since January 2021. Meanwhile, Owners’ Equivalent Rent (OER) rose 0.2% vs. 0.3% in April and 0.5% in March. Pre-pandemic, OER – the largest single CPI component – varied between 0.2% and 0.3%, so returning to that range after the lockout-inspired hiccup from April and May, was a clear positive to the report. Also soothing to the Fed was Core Services ex-Housing (Super Core) which decreased -0.21%, the largest monthly drop since May 2020, and compares to 0.27% in May and +0.45% in April (see graph below).

 

• Another head-scratcher included Lodging Away from Home as it decreased 2.3%. That’s a bit surprising given the ongoing World Cup across several US venues. With scenes of stadiums full of visiting fans, hunkered down for the month-long tournament, one wouldn’t guess hotels were finding the need to cut prices. Even airfares got into the act, increasing only 0.2% vs. 2.7% in May and 2.8% in April. The YoY rate, however, was a stout 26.5%, so maybe the airlines have relented on price hikes for now. To be fair, airline execs would point to the 23.4% increase in annual fuel costs to defend those higher airfares.

 

• New Fed Chair Kevin Warsh made his first appearance on Capitol Hill yesterday in front of the House Financial Services Committee. While the friendly inflation report released just before his appearance may have greased the skids, Warsh didn’t want to take a victory lap just yet saying, “There might be some that look at this morning’s data and say, ‘Oh, mission accomplished. Everything is swell. That is not my view.” Frankly, there’s no one on the committee who would say mission accomplished off one report, but his point was reassuring given the President’s oft-stated wishes for lower rates. He stressed that inflation is a choice and simply a matter of monetary policy. The supply constraints forced on the global economy coming out of Covid lockdowns, including labor markets, might take issue with that comment. He did praise the state of the economy and the labor market. Of that condition, the Fed should get some credit, but the Chairman was not in the mood to hand out bouquets.

 

• Warsh is now the head of the committee that has navigated a sea of one-off challenges and raising rates too late was an obvious error in hindsight. But not sending the economy into a recession and unemployment soaring was a positive outcome. Fortunately, yesterday’s cool inflation report gives the committee time to act, so cobbling together a consensus to hike won’t be necessary for this month’s meeting but check back in September and see how the collegial atmosphere is at that month’s FOMC meeting.

 

• Today brought us June PPI and it was also cooler than expected much like CPI. Headline Final Demand was down -0.3% vs. 0.0% expected and well off the 0.6% increase in May and 1.1% in April. The YoY rate decreased from 6.5% to 5.5%, below the 6.2% expectation. Ex-food, energy and trade the index increased 0.1% vs. 0.3% expected, and easily better than the 0.8% pace in May. The YoY rate, however, was unchanged at 5.1%. Despite the improvement in June, YoY rates remain the highest since early 2023 when rates were retreating after peaking in late 2021/early 2022 at 7.0%. With this report, and especially its healthcare, airfare, and portfolio mgmt. costs, and the Import/Export Price Report due Friday, analysts will be able to provide fairly accurate estimates of the Fed’s preferred inflation measure, PCE, due on June 30^th and currently tracking at 0.2% with today’s new data.

 

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Fed Funds Futures at 61% odds for a Rate Hike at the September FOMC Meeting  Source: CME Group

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June CPI and Core CPI Head Decisively LowerSource: BLS

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Core Services Ex-Housing Surprisingly Drops -0.21% MoM: “Sticky” Inflation Turned Lower in June Source: BLS

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Owners’ Equivalent Rent – After a Spike in April and May from Gov’t Shutdown Delayed Data, OER is Back in Pre-Pandemic Range

Source: BLS