The Market Has Spoken, and it says the Federal Reserve won’t raise rates tomorrow.
After the May inflation print came in a bit lighter than forecasts, Fed funds futures are priced like it’s a near certainty the US central bank will hold rates steady in their 5-5.25 per cent range.
(For specifics: CME’s FedWatch shows futures markets pricing a 94-per-cent probability of US rates staying in their current range this week, compared with 79 per cent yesterday.)
But how much lighter did inflation come in, exactly? While lower energy costs and a slowdown in food inflation weighed down the broad inflation figures, shelter and used-car inflation remained strong. So it was a bit of a mixed bag, which helps explain why a rally in Treasuries kicked off by the CPI report had petered out by midday.
One thing the CPI (and the market reaction) shows is that it’s rather unhelpful to look at broad headline numbers without digging into the underlying drivers. So let’s take a look at a few individual sectors, with the aid of this chart from Wells Fargo:
1) Rents. US rent inflation decelerated a bit, with May shelter costs up 0.5-per-cent from the prior month (compared to April’s 0.6-per-cent rise in rent, and 0.5 for owners-equivalent rent). That’s in line with the predictions from Goldman Sachs economists earlier this week.
Hotels, for their part, did see a significant jump in prices, with lodging away from home rising 1.8 per cent for the month on a seasonally adjusted basis, and 2.6 per cent unadjusted.
All in, shelter inflation was the biggest contributor to the month’s increase in CPI.
2) Used cars. Inflation in used cars and trucks didn’t slow at all on a seasonally adjusted basis. Prices rose 4.4 per cent in May alone, in line with April’s 4.4-per-cent jump. Used cars and trucks were the second-biggest contributor for the month’s inflation; the recent decline in wholesale used-car prices hasn’t even started to show up for buyers.
Car insurance didn’t help either! It was up a seasonally adjusted 2 per cent for the month, and 17 per cent over the year ended May.
3) Food. The cost of in groceries crept up in May after a couple of months of declines, but only rose about 0.1 per cent.
Egg prices slid 13 per cent (!) for the month, as the supply pressures from earlier this year eased.
Oh, and pork costs were down 0.8 per cent from the prior month. Looks like the “Summer of Pork” is indeed getting under way.
Mixed data is “likely to help confirm pre-release biases in the outlook among investors”, says Jefferies economist Thomas Simons:
The soft landing/”immaculate disinflation” camp can point to the deceleration in the headline, deceleration in core services, and the fact that headline would have been flat if it weren’t for used cars as signs that the Fed is getting what it wants without having to engineer a big slowdown in growth. However, the hard landing camp can point to the decline in energy prices that won’t be repeated, and the continued pressure in both shelter and core service prices as reasons to expect that consumers are going to pull back on discretionary spending as reasons to believe we are already headed for a recession.
We have been in the hard landing camp for a while now, and we have no reason to change based on this data. This does not change anything for the Fed either, as they are overwhelmingly likely to pause at the meeting tomorrow, and unlikely to be forced to hike again this cycle.
But really, not much has changed, says JPMorgan’s Michael Feroli:
One can make a hopeful case out of today’s figures, particularly if you believe industry data on rents and supplier delivery indices portend softer rent and goods prices. However, that same argument could have been made a few months ago, and so far, it’s hard to see much improvement. By our reckoning May core PCE looks on track to increase 0.35%, or 4.7% on a year-ago basis, which would be unchanged from April.
And “directional progress should not be confused with mission accomplished,” say Wells Fargo’s Sarah House and Michael Pugliese:
We expect a more noticeable deceleration in core prices in the coming months. Shelter inflation appears to have peaked and should continue to slow in second half of the year. The recent jump in used autos prices is not sustainable, and we believe this category should resume its downward descent very soon. Excluding used autos, core goods inflation has shown signs of easing amid normalizing supply chains and moderating demand.
[ . . . ] If, as we expect, core CPI is still growing at a 3.0%-3.5% annualized rate in the fourth quarter of this year, it should keep the FOMC from cutting rates until 2024. In the more immediate future, today’s data should lock in a pause at the June FOMC meeting, i.e. no rate hike. However, we expect Chair Powell’s press conference and the latest Summary of Economic Projections to signal that one more rate hike is still in the cards.
Source: Economy - ft.com
