Market 05/15: CPI dips slightly - market raises expectations for Fed rate cut

CPI dips slightly: positive sign for Fed - but not decreasing fast enough yet

Annual CPI growth (y/y) as expected - Core CPI cools for the first time in 6 months

• Headline CPI rises +3.4% YoY as expected (prev. 3.5%).

• Core CPI (ex food & energy) rises +3.6% YoY (prev. 3.8%).

→ Inflation pressure eases slightly: Fed's higher for longer rate policy finally takes effect on core CPI, albeit quite slowly.

Month-over-month: CPI m/m growth lower than market expectations

• Headline CPI rises +0.3% MoM (forecast: +0.4% m/m | prev. 0.4%).

• Core CPI rises +0.3% MoM (prev. 0.36%).

Services CPI leads the increase - Supercore CPI growth (m/m) finally slows

• Overall, core services prices on an annual basis still grow strongly.

• Similar trend on a monthly basis:

• Supercore CPI (core services CPI ex housing) still rises quite high:

  • Of which, transportation and medical services account for the bulk of Supercore CPI increase.

• But monthly growth data (M/M) shows Supercore CPI has slowed: growth at +0.42% M/M (vs. +0.65% M/M previous month)

  

Unlike services, Core Goods CPI is in deflation: -1.3% YoY, the sharpest decline since 2004.

Some notable categories

• Auto insurance surges +22.6% YoY, largest contributor to CPI increase.

• Food price growth has reverted to pre-Covid levels, up +2.2% YoY.

• Owners' equivalent rent up +5.3% YoY, still remains high (top of services inflation) however has slowed since Feb 2022.

• Airline fares down -5.8% YoY.

• Used cars and trucks prices down -6.9% YoY, largest decline since 2009.

However, note that average hourly earnings are still rising strongly per CPI survey:

• Food industry wage growth continues upward

• While wage growth (+3.92% y/y) remains higher than price growth (inflation +3.4% y/y)

  

• If income continues to rise, it will be very difficult to sustainably reduce inflation (wage-price spiral)

  • Need clear signs of weakening wage growth to ensure sustainable inflation decline.

April retail sales no growth - Consumer demand weakening

• April retail sales unchanged m/m - 0% m/m growth (est. +0.4% m/m, prior +0.6% m/m).

• Both total and core retail sales slowed y/y.

• Most spending focused on essentials such as food and gasoline (strongest increase since Aug 2023).

• Sales at non-store retailers + auto dealers, parts largest monthly decline.

• Control group (used in GDP calc) down -0.3% MoM (prior +0.1% MoM), down 3/4 recent months.

  • Control group: sales excluding revenue from auto dealers, building material stores, gas stations, stationery stores, and tobacco stores. Used to more accurately measure consumer spending.

Market reaction after CPI data and Retail Sales

• 2Y Treasury yield drops sharply after CPI and retail sales report.

• Market expects 2 times interest rate cuts in 2024, starting in September.

• Market rallies after 2 reports.

• S&P 500 hits all-time high.

  • S&P 500 up 11.5% this year

Even if retail sales deteriorate (no growth despite ongoing inflation), it will take some time to affect CPI.

While CPI only decreases slightly - Fed still has a long way to go to bring CPI back to 2%.

Therefore, the market is overly excited - this could put pressure on inflation as household income from the stock market continues to rise.

Weekly crude oil inventories drop sharply vs expectations

API Report:

• Crude: -3.1 million (-1.1 million exp)

• Cushing: -601k

• Gasoline: -1.27 million (unch exp)

• Distillates: +349k (+300k exp)

DOE Report:

• Crude: -2.508 million (-1.1 million exp)

• Cushing -341k

• Gasoline: -235k (unch exp)

• Distillates: -45k (+300k exp)

• Biden administration continues to add 593,000 barrels of oil to the Strategic Petroleum Reserve (SPR).

Other news:

1. Slovak Prime Minister Robert Fico shot 4 times after government meeting, injuries unclear.

2. Empire Manufacturing index for April drops sharply to -15.6 vs estimate -10.

• New orders dip slightly from last month.

• Employment declines and remains in contraction.

3. El Salvador mines 474 Bitcoin using volcano geothermal energy.