The market’s response was rather muted in the face of another red-hot inflation report from the United States, lifting to a 41-year high of 9.1%.
Major US indices sold off sharply in the first few minutes of trade, down between -1.5% to -2.1%. It was an almost V-shaped rebound thereafter, but benchmarks still closed lower, between -0.15% and -0.7%.
Then again, anything short of an inflation surprise, is a surprise - given how all but one CPI reading since 2021 has topped consensus expectations and how the US has declined on every single CPI release this year, except January. So maybe, the market’s starting to feel numb when it comes to tiny surprises.
Surging energy costs were widely expected, especially given the number of tweets from President Joe Biden blaming servos for US$5 a gallon gas prices.
What came as a surprise was the further acceleration in shelter categories.
“The 36-year-high rent reading poses upside risk to the path of the funds rate in the second-half of the year, as shelter is one of the largest and most persistent inflation categories,” said Goldman Sachs.
Shelter is the single biggest component of CPI, worth 33% of the index. Though, the category is substantially understated, said to be up 5.6% year-on-year in June, even when rents are up 14.1% and home prices up 20.4%.
The pullback in US gas prices is expected to provide some relief in the next CPI reading.
According to the American Automobile Association, gas prices have fallen to US$4.63 a gallon, down from a peak above US$5 in mid-June.
President Joe Biden was quick to call the June reading as “outdated” given “energy alone comprises nearly half of today’s inflation numbers.”
“The price of gas has decreased for 30 days straight, the price at the pump has dropped by 40 cents since mid-June,” said Biden, adding that “gas should continue to come down in the days and weeks ahead.”
With that in mind, the June reading doesn't seem so bad.
US interest rate futures now expect an 81.5% likelihood of a super-sized 100 bps rate hike, up from 7.6% a day ago and zero last week.
When Atlanta Fed President Raphael Bostic was asked about the possibility of a 100 bps rate hike in July, his response was “everything is in play”. Bostic said the June inflation read ‘didn’t go in the direction I was hoping’, and the Fed will have to take that on board.
As more and more central banks begin to pivot towards front-loading interest rate hikes, the economy must brace for a not-so-soft landing.
While markets might be rebounding today, 100 bps is in the rearview mirror.
The Fed will make its interest rate decision later this month on Thursday, 28 July.
Perhaps the forward looking market is relishing the idea of rate cuts once the Fed hits its a desired neutral interest rate level.
Nomura expects the US to enter a recession in the fourth quarter of 2022 but forecasts the Fed to keep on hiking to a peak of 3.50 - 3.75% in February next year, according to Reuters.
As inflation normalises, the Japanese investment bank predicts a 25 bps rate cut from September 2023.
For now, the market is perhaps finding the comfort in the Fed's interest rate outlook.
"We are very close (if not now already at/in-passing) the peak rates hawkishness (specifically the messaging from the Fed, and actual Fed funds rate, if not the 10s) and then we can slowly get back to a normalised path for everything else," wrote Aequitas Investment Partners in a note on Thursday.
If markets can price-in what increasingly looks like 'peak rates hawkishness', then perhaps we can finally get moving along - assuming we can avoid a recession and further upsets.
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