Inflation
Given the shift in focus by the Federal Reserve and Chair Powell’s comments that he expected inflation to move higher in the coming months there seemed to be some asymmetric risk to this week’s inflation data where markets would largely discount a hot print and might reward a cooler number. On Wednesday headline PPI was up 0.1% m.m in August, below expectations of +0.3%, a moderation from the hot downwardly revised 0.7% increase last month. Core was down -0.1% and below expectations while ex-Food, Energy and Trade rose 0.3%, below last month’s 0.6% increase. As has been the case for the last few months Final Demand Trade Services was responsible for a lot of the movement. Last month it was up 1.0% (revised down from 2.0%), but this month it fell 1.7%. This is essentially a measurement of wholesaler/retailer margins and has been scrutinized to see whether businesses are eating tariff costs or passing them on to consumers. Final Demand Goods less food and Energy rose 0.3% m.m, down from 0.4% last month. Given the volatility in this data, it is painting a hazy picture.
The CPI report wasn’t nearly as positive but squarely fell in the better than feared bucket. Headline CPI accelerated in August up 0.4% m/m, up from 0.2% in the previous month, and ahead of expectations of 0.3%. The annual reading was in line with expectations 0.2% higher than the prior month’s 2.9% reading, driven by an increase in both food and energy costs. Core was in line with consensus estimates and held steady from last month up 0.3% m/m and 3.1% y/y. Within core goods inflation picked up to 0.3% from 0.2%. There were increases in many of the tariff related areas including autos and apparel. However, you could see signs of the underlying weakness in housing related products. After a large jump last month household furnishings and supplies moderated while appliances fell 1.8% after increasing by the same amount last month. However, within services we still do not see the offsetting housing disinflation everyone has been looking for with shelter ticking back up to 0.4% from 0.2%. Medical care goods and services both fell, helping to counterbalance some of the other increases.
Fed & Treasuries
This week’s data increased the volume of the debate as to whether the Fed should cut by 50bps next week however, that view didn’t show up in futures markets. Instead, traders increased the probability of cuts at all three of the remaining Fed meetings this year, a view which is being blessed by multiple investment banks this morning.
As we start to think about next week, if this week’s data shifted some of the views on the Board, you’d expect that to get leaked in some way as the Board typically does not want to surprise the market. Since we haven’t seen an influential investment bank go out with that call yet and there hasn’t been a story floated in the WSJ/FT it seems pretty unlikely but there is still some time.
That being said, we still don’t know for sure what the makeup of the voters will be next week. For the moment Lisa Cook will be participating but the administration has filed an appeal after the ruling earlier this week. The Senate Banking Committee advanced Stephen Miran’s nomination this week and his Senate confirmation could take place on Monday which would give him access to the two-day meeting. If in fact the Fed cuts by 25bps, it would not be surprising to see a couple of 50bps dissenters.
This week there was a flattening of the yield curve. The 2yr yield was up ~5bps to 3.56%, essentially reversing last week’s post jobs move lower. The 10yr yield was about flat while the 30yr fell 7bps to 4.69%. This week’s 3/10 yr Treasury auctions were very well received pricing below the when-issued market with very strong underlying metrics. The 30yr was also solid but wouldn’t make honor roll.