Baker Market Update
2024-07-12

Thursday’s reading of the Consumer Price Index (CPI) showed disinflation is back in the rotation for the first time since the onset of the pandemic. Headline prices actually fell during the month of June amid cheaper gasoline prices and moderating rents, marking the first deflationary print since 2020. Economists had forecast the headline CPI reading to tick up 0.1%. Instead, it fell 0.1%. The annual reading also dipped below 3% for the first time in twelve months, coming in at 2.971% vs. 3.1% survey.

A big drop in weekly jobless claims also hit newswires at the same time yesterday, laying the backdrop for plenty of market volatility. However, the decline in the number of workers seeking weekly jobless benefits can probably be attributed to typical summertime volatility. Nevertheless, the Nasdaq fell almost 2% and the S&P 500 lost almost 1% yesterday while Treasuries rallied and yields fell ~7-11bps across the long end of the curve.

The second straight month of benign consumer price readings was unquestionably good news for the Fed and policymakers were quick to laud the numbers. St Louis Fed President, Alberto Musalem, called June’s CPI report "encouraging", San Francisco Fed President, Mary Daly, said the readings were a “relief, and Chicago Fed President, Austan Goolsbee, called it “profoundly encouraging”.

Futures markets agreed and increased their rate cut bets for the remainder of the year. Traders now have a 25bp rate cut fully priced in by the September meeting and futures markets are showing ~2.5 rate cuts expected in 2024. There is also now discussion circulating of a potential 50bp cut at one of the meetings before the end of the year. Futures markets buying already indicates some traders are betting on a supersized move at the September meeting.

This morning’s readings of producer prices, however, showed the Producer Price Index (PPI) moved higher in June, slightly more than expected. PPI increased 0.2% vs. 0.1% forecast. Compared to a year ago, producer prices were up 2.6%. Nearly all of the monthly increase can be pinned on a jump in margins at wholesalers and retailers. However, separate reports from retailers including Target and Walmart show the merchant giants cutting prices on a range of goods as consumers push back against higher prices.

Next week will give us several readings on the state of the housing market, which continues to struggle amid high interest rates. Numbers are also due on retail sales and US manufacturing and production. Have a great weekend!