Inflation Week Delivered some Surprises

• Inflation week delivered some surprisingly cool results for June, but investors decided that one month of cool numbers is not enough to jump on the low inflation bandwagon for a few reasons.  First, the CPI beat was so widespread that it seemed as though all the previous trouble spots decided to play nice for a month. That rarely occurs in back-to-back months. Second, much of the cooling was energy-related and some of that is being reversed as we speak. Finally, the Fed’s preferred inflation measure, PCE, is not due until July 30 and after all the reports this week that feed bits and pieces into PCE, the core estimate for June is still at 0.2%, pretty much where it’s been of late, so no big improvement is expected there. It does, however, give the Fed reason to pause this month and wait for confirming data to arrive in the July and/or August reports. Next week will be a quiet one with the Fed in its pre-FOMC blackout and very little of consequence on the data front, so trading will be dominated by Middle East developments and the price of oil.  Equity markets are under pressure globally this morning as fears that another cheap Chinese AI knockoff will threaten the more expensive Western tech/chip-complex and that has put a bid into Treasuries in early trading. Currently, the 10yr is yielding 4.52%, down 5bps, while the 2yr is yielding 4.13%, down 3bps on the day, and those lower yields are despite WTI Oil back above $80/bbl.

 

• The last of the inflation reports for this week was delivered this morning with the June Import/Export Price Report. The Import Index increased 0.3% vs. -0.6% expected and May’s 1.7% result. Ex-petroleum, import prices rose 0.4%, matching expectations and below the 0.7% from May. YoY gains increased from 6.7% to 7.1%, easily above the 6.7% expectation and the highest YoY pace in four years.  One piece of bad news in the report will be foreign airfares up 12.6% during the month, and that follows an 11.3% increase in May. That piece gets put into PCE so while it may not be weighted enough to shift the expected 0.2% core PCE gain to the more precarious 0.3% level, it certainly nudges it in that direction. Our monthly caveat to this report is that price changes are before tariff expenses, so it reflects true offshore pricing for domestic purchasers. Any tariff impact will be in addition to the price gains listed here. Meanwhile, export prices showed moderation as well, with the monthly price down –0.6% matching expectations and below the 1.2% gain in May. The monthly decrease was due primarily to lower oil prices offset slightly with higher agricultural prices. The YoY gain, however, remained stout at 10.2% vs 11.2% the prior month

 

• Yesterday, the latest Retail Sales Report was solid if unspectacular with no obvious signs of the consumer buckling under the pressure of higher prices. Headline sales increased 0.2%, matching expectations but short of the 1.0% May gain. While lower gas prices certainly moderated the spending growth for the month, sales ex autos and gas were solid at 0.4%, matching expectations but short of the 0.8% May increase. The core spending category, the so-called Control Group, posted a 0.5% gain, also matching forecasts but again trailing the robust 0.7% in May. In a sign of consumer stability, it’s the sixth straight month with the Control Group near 0.5%, or higher.  In summary, it was a solid if unspectacular month of spending by the US consumer, and while short of the May gains was respectable. It’s a steady-as-she-goes performance for the consumer and speaks to the economy as a whole continuing to motor along, perhaps a bit slower, but with little indication of an imminent trend change.

 

• Finally, Initial Jobless Claims remained quiet with initial claims decreasing from 216 thousand to 208 thousand with the 4-week moving average decreasing from 219.00 thousand to 214.25 thousand. With claims decreasing from the prior week, the weekly total remains low by historical standards and has yet to signal a material pick-up in layoffs. If there is another shoe to drop in labor market stability this indicator will be the first to signal that but the downtick in weekly claims, and drop in the 4-week average, speaks to a continuation of the low-fire environment.

 

• Continuing Claims were rather quiet as well with the July 4th week seeing claims decrease from 1.821 million to 1.805 million, below the 1.820 million expectations. The series started the year at 1.900 million and has been in a gradual downtrend this year.  With the decrease in both initial and continuing claims, the series has yet to signal a material increase in layoffs. Thus, the Fed has the leisure of waiting for inflation improvement as labor market stability remains firm.

 

• Later this morning (10am ET)  the preliminary July University of Michigan Sentiment Survey will be released. The headline sentiment reading is expected to improve slightly to 51.0 vs. 49.5. Current Conditions and Expectations are also expected to increase slightly from June levels, but still historically low. Meanwhile, inflation expectations are expected to ease slightly from 4.6% to 4.5% in the 1-yr horizon and the 5-10yr horizon unchanged at 3.3%. The Fed looks at that long-term expectation and wants it “well anchored”, so an unchanged reading is ok, but what will be even better for the Fed is to see it drifting lower towards the 2% target level.

 

---

June Retail Sales Control Group (Core Sales) – Sixth Straight Month of Solid Consumption

Source: US Census Bureau

---

Initial and Continuing Jobless Claims – The Low-Fire Trend Continues

Source: US Dept. of Labor

---

PPI Components Used in PCE Calculation – While Headline PPI Was Cool, PCE Pieces Not Quite as Much

Source: BLS