Finally, a Cooler CPI Report

  • For the first time in what seems like forever, CPI came in cooler than expected and markets, both Treasuries and stocks, are rallying as a result.


  • The overall inflation rate was unchanged for the month versus the 1.3% increase in June and better than the 0.2% expected. It’s the lowest monthly overall reading since May 2020. The unchanged reading was driven by an expected decrease in gas (-7.7%), but a moderation in services expenses aided the effort as well. Overall services rose just 0.3% vs. 0.7% in June. The slowing in services was driven by some moderation in housing expenses which saw a gain of 0.4% vs. 0.8% the prior month.


  • The year-over-year rate rose to 8.5% vs. 9.1% in June and 8.7% expected. Obviously, that’s still an excessive reading and one the Fed will continue to drive lower with continued rate hikes.


  • Ex-food and energy, the results were somewhat encouraging as well with the core rate increasing 0.3% which was below the 0.5% expectation and the 0.7% print in June. It’s the lowest monthly gain since March.


  • The YoY core rate stayed at 5.9% but that beat the 6.1% expectation. A stagnant YoY rate, however, is likely over the next several months as we’ll see smaller monthly rates roll off from 2021. Improvement in the YoY core rate will prove difficult until October when 2021 monthly rates popped to 0.5% and 0.6% gains through year-end.


  • It wasn’t all good news in the report, however. While gas prices declined during July, they are still up 44% YoY and food prices continue to rise with a 1.1% monthly gain vs. 1.0% in June and 11% YoY. That will keep households second-guessing the market’s positive reaction to today’s report.


  • The report may dent odds that the September meeting will be another 75bps hike, but the hot jobs report from last Friday will continue to be a factor driving the Fed’s decision as well. Keep in mind too, the Fed will see the August CPI report before the meeting which will obviously influence the decision as well. The latest fed funds futures pricing has the December 2022 rate at 3.48% vs. 3.62% prior to today’s report, so a modest decrease in rate-hiking expectations. Talk of a higher terminal fed funds rate, like we heard from Bullard earlier in the week, may dim too.


  • Treasury yields are lower across the curve, but the rally is being led by the short end as some of the rate hiking expectations are taken off and that is reducing some of the curve inversion. Still, the 2yr -10 yr inversion sits at 38bps which remains near a 22-year low.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.12 3.11 3.09 3.12 3.26 3.72
0.50 3.11 3.09 3.03 3.01 3.12 3.61
1.00 3.10 3.05 3.00 2.97 3.03 3.48
2.00 3.04 2.94 2.89 2.91 NA
3.00 2.84 2.85 NA
4.00 2.80 NA
5.00 2.76 NA
10.00 NA

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Published: 08/10/22 Author: Thomas R. Fitzgerald