US CPI reaffirms rate-cut bets as stocks clock fresh all-time highs

US Stocks clock fresh records

Major US equity indices, once again, explored uncharted territory on Tuesday, following ‘benign’ US inflation data. Led by the communication services and technology sectors, both the S&P 500 and the Nasdaq 100 clocked fresh record highs, with the former rallying 1.1% to 6,445, and the Nasdaq 100 adding 1.3% to reach 23,839. While the Dow Jones Industrial Average failed to pencil in all-time highs, it managed to chalk up a healthy 1.1%, hitting 44,458.

In the FX space, the US dollar (USD) concluded Tuesday down 0.5% (Dollar Index), journeying back under its 50-day simple moving average, with the euro (EUR) and British pound (GBP) benefiting, rallying 0.5%. Meanwhile, in the commodities complex, Spot Gold (XAU/USD) and Silver (XAG/USD) remained largely subdued yesterday, though the latter is up in Asia today by 0.6%. Oil markets, however, took a hit in recent trading, sending WTI (West Texas Intermediate) lower by 1.4%.

US CPI inflation data

Taking a closer look at the inflation numbers, shelter prices were primarily behind the MM rise in the headline print, increasing by 0.2% (matching June’s 0.2% reading). Food prices were unchanged (down from 0.3%), while energy prices helped keep the headline YY print subdued, dropping 1.6% (down from a fall of 1.1%), as per the energy index. Gasoline prices also fell by 2.2% MM (down from a gain of 1.0%), and were lower by 9.5% YY.

Digging deeper

Taking a closer look at the inflation numbers, shelter prices were primarily behind the MM rise in the headline print, rising 0.2% (matching June’s 0.2% reading). Food prices were unchanged (down from 0.3%), while energy prices helped keep the headline YY print subdued, dropping 1.6% (down from a fall of 1.1%), as per the energy index. Gasoline prices also fell by 2.2% MM (down from a gain of 1.0%), and were lower by 9.5% YY.

Airfares rose by 4.0%, following three months of falling prices. Apparel saw a mild increase of 0.1%, down from the 0.4% gain in June. What was meaningful in this segment, however, was Infant and toddlers’ apparel, which increased by 3.3%, from 0.4%, with footwear also showing a marked uptick of 1.4% (from 0.7%). New vehicle prices remain largely muted, though used car prices reported a 0.5% increase; this follows two back-to-back months of falling prices.

September cut?

Despite the core reading’s modest overshoot, market participants remain focused on the Federal Reserve’s (Fed) policy trajectory for September’s meeting. The data effectively reinforces expectations for policy easing next month, enabling the central bank to pivot towards addressing labour market softening – the complementary pillar of its dual mandate. You will likely recall that the US July payrolls data showed a total downward revision of 258,000 in May and June, leaving the three-month payroll average at 35,000.

As I expressed in the week-ahead briefing, assuming inflation remains relatively contained, I expect the Fed will cut rates in September. Money market expectations continue to forecast 60 basis points (bps) of easing, with September fully priced in for a 25 bp reduction. Therefore, dip-buying in the equity space will likely remain the dominant theme, with potential for USD downside, barring any unforeseen events. It is worth noting that before September’s Fed meeting, we have another CPI and jobs report to work with, as well as a PCE release (Personal Consumption Expenditures) at the end of August.

Regarding the jobs data, and I apologise for digressing here somewhat, but you may have read that the newly nominated BLS commissioner, E.J. Antoni, recently voiced the intention to suspend the monthly publication of jobs data until ‘it is more accurate’, opting for a quarterly release! This was said a week before his nomination, but according to White Press Secretary Karoline Leavitt yesterday, the plan is to continue monthly reports, thankfully.

What’s ahead?

Macro event risk is thin on the ground today, but tomorrow welcomes US July PPI numbers (Producer Price Index) and retail sales data on Friday.

Expectations for MM PPI data suggest producer inflation rose by 0.2%, up from 0.0% in June, while the YY print is also expected to increase by 2.5% (up from 2.3%). This is an important report. Similar to the CPI data just released, some of the PPI data feeds into the PCE report, which is what the Fed targets for inflation – the headline measure.

As for retail sales data, economists expect a gain of 0.5%, slightly lower than 0.6% in June, with the retail control group forecast to slow to 0.4%, down from 0.5%. The retail control group figure is also an important print, which excludes volatile components like auto sales and gasoline prices, and is used in GDP calculations (Gross Domestic Product).