Evening Brief – 07.12.23

The consumer price index slowed to 3% year-over-year in June from 4%; its lowest level since March 2021, and 0.2% on a month-over-month basis, lower than the 0.4% reading in May. Both the annual and monthly rates were below economist expectations of 3.1% and 0.3%, respectively.

This is the 12th straight month of annual declines in headline CPI.

Meanwhile, Core CPI, which excludes food and energy, dipped to 4.8% year-over-year from 5.3% and 0.2% monthly, again below expectations of 5% and 0.3%, respectively. The year-over-year rate was the lowest since October 2021 and the monthly figure was the smallest one-month increase since August 2021.

As Bloomberg chief economist Anna Wong wrote, “The weak core CPI reading for June is likely the start of a string of readings over the next few months that will show annualized core inflation running close to the Fed’s 2% target. The Fed is all but certain to hike by 25 basis points in July, but the favorable CPI report will bolster voices on the FOMC arguing that July’s hike should be the final one.”

Yet, while a dovish print was expected, FOMC members have made it clear they consider the dangers of being too dovish exceed the risks of being overly hawkish.

The Federal Reserve is attempting to convey that if it eases up on tightening and inflation rises sharply, they will be forced to become even more aggressive. It’s a question of not wanting to go back to the 1970s playbook, when policymakers were quick to lower interest rates at the first whiff of easing inflation.

Interestingly, following the CPI release, the Fed Funds futures barely budged, with over a 90% chance of a July rate hike still baked into the market. As for September, odds dropped to 17% from 30%.

With the Fed Funds target range now more than 200 basis points above headline CPI, and if inflation continues to cool, investors may want to position for a peak in yields – as discussed in previous editions of our Evening Brief.