“No, I would not give you false hope
On this strange and mournful day
But the mother and child reunion
Is only a motion away” – Paul Simon
We are waiting for today’s crucial CPI data.
Powell’s recent congressional testimony has set a generally optimistic tone for the markets in over the past two days. Powell’s testimony to Congress acknowledged progress on inflation and an implied intention to cut rates (certainly not to raise them) as soon as the data shows solid progress towards the Fed’s 2% target and May CPI was, in fact, 0.2%, which is 2.4% annualized.
In June we saw Oil pop from $72.50 to $82.50, Used Car Prices have fallen back, Wage Growth has slowed substantially, Rents are easing but New Home Prices are still high but that may be moderated by the fact that no one is actually buying any homes… Food Prices have mostly calmed down but July will usher in increases in Travel and Hospitality – so we’ll see how it all balances out.
“We’ve seen inflation come down substantially from its peak,” Powell stated, but emphasized, “We need to see more progress… We’re not declaring victory at all.“
This measured approach has fueled market hopes for potential rate cuts later this year, with Powell noting, “We’re in a position where we can be careful in assessing incoming data.“
The market’s reaction has been decidedly bullish, with the S&P 500 blasting to new record highs. Investors seem to be interpreting Powell’s comments as a signal that the Fed is inching closer to ending its tightening cycle.
Today’s CPI report, expected to show a 0.1% monthly increase and a 3.1% annual rise (as we started the year much hotter), could provide crucial support for Powell’s cautious optimism. If inflation continues to cool as anticipated, it could further strengthen the case for rate cuts, possibly as early as September.
Tomorrow’s PPI data will add another piece to the puzzle, with forecasts suggesting a continued easing of producer price pressures (0.1% also expected there). This one-two punch of inflation data sets the stage for the start of Q2 earnings season, kicking off Friday with major banks like JPMorgan, Wells Fargo, and Citigroup reporting.
As we navigate this data-heavy week, the markets seem poised on the edge of hope and caution. Powell’s “mother and child reunion” of lower inflation and economic stability may indeed be “only a motion away,” but investors would do well to remember his warning against premature victory declarations. The coming days will reveal whether this hope is well-founded or if we’re in for a “strange and mournful” awakening.
8:30 Update: Minus 0.1% – That’s way lower than expected on CPI but exactly what we predicted in the headline so things are going according to my plan! Core CPI is 0.1% – as expected and this very light reading (lowest since Aug 2021) is cheering up the markets already (not that they needed more cheering).
America is looking great, but we can make it greater:
“I can’t for the life of me
Remember a sadder day
I know they say “let it be”
But it just don’t work out that way” – Same song…
