7/12/24 - US Economic Recap: Fed Testimony, Inflation Data, and Market Reactions

This week presented several important inflation related economic releases. Along with the inflation data, Federal Reserve Chair Jerome Powell testified on Capitol Hill to field questions on the current state of the economy and monetary policy.

On Thursday, the Consumer Price Index (CPI) data indicated continued slowing of inflation. Headline CPI and Core CPI measures both slowed to 3.0% and 3.3% year-over-year respectively, while month-over-month CPI had the first deflationary print, at -0.1%, since the pandemic. Core CPI marginally increased 0.1% month-over-month. All the CPI metrics came in below consensus estimates for June. The lower inflation data was driven by lower prices for core goods and energy. The services components, particularly shelter costs via Owner’s Equivalent Rent (OER), are also showing signs of deceleration and contributing to lower inflation. Although the progress of lower inflation continues, the Producer Price Index (PPI) data released Friday showed mixed results in the change of the price of goods as they leave their place of production. Prices increased slightly on a broad basis as measured by Final Demand month-over-month and year-over-year, yet core measures stripping out food, energy, and trade decreased.

Chair Powell was emphatic in his testimony before Congress about not disclosing the timing and magnitude of reducing the Fed Funds Rate, “Once again, I will say I am not sending any signals on any day of any meeting whatsoever on policy.” Yet, he did provide some remarks which indicated that the Fed may not wait until inflation falls below the 2% target to ease monetary policy, “You don’t want to wait until inflation gets all the way down to 2% because inflation has a certain momentum…If you do, you’ve probably waited too long because it will be moving downward and go well below 2%.” Chair Powell’s comments, taken together with the lower-than-expected CPI data, align with our view at Chandler that a September or early fall Fed Funds Rate cut is a plausible scenario.

More headwinds for the consumer also seem to be mounting. According to the Federal Reserve, total consumer credit outstanding increased $11.354 billion in May. The increase was attributed to higher credit-card balances and brought total credit outstanding to a record high of $5.064 trillion. Consumer Sentiment also continues to slump. According to the University of Michigan Consumer Sentiment Surveys released Friday, overall consumer sentiment fell in July to the lowest level of 2024 with the preliminary result at 66. The survey also indicated consumer angst with the present situation as the Current Economic Conditions survey fell to 64.1 for July marking the lowest level since December 2022. However, on a positive note, consumer expectations for inflation fell to 2.9% on both the one- and ten-year horizons for July.

The US Treasury market rallied significantly on Thursday after the lower than anticipated inflation data which resulted in lower yields and higher prices for treasuries across the yield curve to end the week. The yield on the 2-year treasury fell from 4.63% on Monday to 4.46% on Friday, the 5-year treasury fell from 4.24% to 4.12%, and the 10-year treasury fell from 4.28% to 4.19%. The post-CPI-release bond market rally seems to indicate a convergence among market participants’ view closer toward our view at Chandler for the potential timing of easing monetary policy.

Next Week:

Empire Manufacturing, Retail Sales, Import/Export Price Index, Business Inventories, NAHB Housing Market Index, Building Permits, Industrial Production, Capacity Utilization, Federal Reserve Releases Beige Book, Philadelphia Fed Business Outlook, Leading Index, Total Net TIC Flows

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