This Economic Mess Is About to Hit the Fan
As the latest data underscores a slowing economy, the Fed faces a rocky road.
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We saw it coming from a hundred miles away. No, make it a thousand. On Wednesday morning, the Bureau of Labor Statistics, yes, the same BLS that can't seem to get its labor survey adjustments right, posted its July data for consumer prices.
For the month of July, headline CPI printed at growth of 0.2%, up from June's number, which was -0.1%. At the core, CPI crossed the tape at growth of 0.2%, accelerating from June's 0.1%. These numbers, though up from June, were both expected.
On a year-over-year basis, headline CPI slowed from 3.0% growth to 2.9%, while core CPI printed at 3.2%, down from 3.3%. Again, both of these numbers were precisely as expected. What pushed up on inflation during July? Fuel oil, shelter and transportation services. What helped place a drag on inflation? Utility gas, new and used vehicles, and medical care services and commodities.
What The?
I noticed going into the detailed weeds of this report that health insurance prices were down 0.4% month over month and down 0.6% year over year. You guys sure about this? I don't know about everyone, but I was just informed of a double-digit increase for 2025 by my health insurer, after having received a similar notice last year and the year before that. I doubt I could find a person whose health insurance costs have decreased over the past month or year, no matter how hard I looked.
Prices for men's suits are down 12% year over year. Um, work from home. Gotcha. You sure it's not also fewer men working full time? Apples were down 1.2% month over month and down 14.5% year over year. That's baloney. I eat more apples than a man probably should. I have never seen apples cost as much as they do right now. Motor vehicle insurance is up 18.6% year over year. That, I believe.
What Does It All Mean?
Financial markets sort of shrugged their collective shoulders on this news and actually took some early profits ahead of Wednesday's open after Tuesday's bull run in response to the slower-than-expected pace of producer-level inflation reported on Tuesday.
How About Going Forward?
This report does nothing to change the narrative in place. The FOMC is still likely to cut short-term interest rates on September 18, 2024. That will come after the Kansas City Fed's dog and pony show at Jackson Hole next week and the release of the August employment surveys by the BLS in early September.
This is going to be one time among many where the market will rot against U.S. economic performance leading into mid-December. I don't like that one bit. Listen, we told readers ahead of time that consumer level inflation would slow into September and then likely reaccelerate from October on into 2025. That is still how the story is shaping up.
We also expect the economy to drag a bit. Recession? We may be in one now. That said, even if we are not, the economy is not popping. We'll learn more about that on Thursday morning with July Retail Sales and Walmart WMT reporting almost simultaneously. I imagine that there will be some warning signs apparent.
The Fed
The market just wants to get to mid-September in one piece so they can get this show on the road. Slowing inflation and a slowing economy are a perfect recipe for an excuse to start rate cuts at that time. As the economy slows while prices accelerate, that's when the mess will hit the fan. The continuance of looser monetary policy at that time in response to weaker economic performance will only serve to fan the flames of rising prices this autumn/winter as the ever-present recklessness of fiscal policy provides the fuel.
Currently, futures markets trading in Chicago are pricing in a 43% probability for a 50 basis point rate cut on September 18, 2024, and a 100% probability for a rate cut of at least 25 basis points. These markets are also pricing in an 80% likelihood for 100 basis points or more of rate cuts by year's end. That's three meetings. There is currently a 36% likelihood for 125 basis points worth of rate cuts by then.
Is that good for equities? In the moment, yes. Is it good as we approach rate cuts and as those rate cuts are announced? Yes. But is it as good once the recession or significant slowdown is recognized and the unemployment rate rises above 5%? Not as much, no.
At the time of publication, Guilfoyle was long WMT equity.
