Market Week: July 18, 2022

    The week in review

  • Headline CPI rose 1.3% m/m and 9.1% y/y
  • Retail sales rose 1% m/m, ex-auto rose 1.0% m/m
  • Consumer sentiment recovered to 51.1 from 50.0 in June
    The week ahead

  • Housing starts and existing home sales
  • Markit Mfg. flash PMI
  • Philadelphia Fed Mfg. Survey

Thought of the week
While markets were anticipating a hot headline CPI reading, the June CPI report showed even hotter-than-expected inflation, with core inflation most surprisingly exceeding expectations. Headline CPI rose by 1.3% m/m and Core CPI rose 0.7% m/m, translating to year-over-year gains of 9.1% and 5.9%, respectively. Sharply higher energy and food prices once against propelled headline inflation higher, while within core inflation, the lagged “bad news” of higher costs of inputs and labor is broadly pushing prices higher.

We still expect that the Fed will hike interest rates by another 0.75% later this month. Thereafter, the broad-based impact of higher food and energy prices across core components may add pressure on the Fed to hike interest rates even further this year.

On the bright side, we see promising signs of inflation coming off its highs in July. Oil and gas prices have dipped meaningfully (down 11% and 4% from June), as have airline fares (down 8%), and this should lead to a deceleration of price pressures in the coming months. Consumer 1-year and 5-year inflation expectations also came down in the University of Michigan’s preliminary July results, dropping from 5.3% to 5.2% and from 3.1% to 2.8%, respectively. If these trends continue, June may mark the last hot month of headline inflation, with stickier components taking the baton going forward. This should provide some inflation relief to the Fed and consumers. However, the question remains whether the Fed will exercise the patience for this lagged “good news” to flow through, or race to stomp out demand before it does.

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