Deciphering Mixed Market Signals from Latest Price Indexes | Episode 154 | 07-12-24

Is the battle against inflation finally taking a turn for the better? We dissect two key reports that could signal major movements in the market. First, we bring you the good news from the Consumer Price Index (CPI) report, where a surprising deflationary reading hints at easing pressures for the Federal Reserve. Falling prices in sectors like energy, vehicles, and airline fares are shaping the economic outlook, so what could this mean for future policy adjustments?

Megan also explores the more complicated picture painted by the Producer Price Index (PPI) report, which came in hotter than expected. Understand the mixed signals this sends to the Federal Reserve and the markets. Plus,she discusses the pivotal role of upcoming labor market reports in determining the next steps for economic policy. Get the comprehensive analysis that will help keep you informed on where the economy stands and the potential road ahead.

It's like we took three steps forward and just one step back. We got two different inflation indicators over the past two days. It's Friday, july 12th, and I'm talking about the consumer price index that we got yesterday, which was a fantastic report for the Federal Reserve, and then the producer price index today, which shows a kind of a mixed message here from the inflation standpoint. But let's break down the consumer side first. On the consumer price index, it actually came in weaker than expected on both the headline and the core level when you extract food and energy. At the headline level, it actually declined for the month, so that's actually deflation. That was the first time we've had a negative number since May of 2020. So, deep into the pandemic. On the core level, where we extract food and energy, it rose only 0.1%. Market was looking for 0.2%, so that brought the year-over-year level down to a 3.3% growth, compared to 3.4% last month, and that's the lowest annual rate since April of 2021. So great news there for the Fed. Not exactly where they want it to be, but it's slowly getting into that trajectory. We knew that getting down to 2% would take more time, be a little bit more difficult to do, but it is moving in that direction.

In some of the details, the energy was a huge component. Obviously, that's why you saw a big decline in the headline level. Energy commodities were down almost 4%. When you look at new vehicles, used cars and airline fares, airline fares were down 5% on a month-over-month basis. On a year-over-year basis, they're actually down 5% as well. Used cars and trucks are down 10% on a year-over-year basis. They're actually down 5% as well. Used cars and trucks are down 10% on a year-over-year basis. So this is a lot of goods and we know this. As the supply chain and all repaired itself and demand for goods started to slow, then we would see this kind of in the prices and we are seeing that. So good, prices definitely lower.

Now the stickier side, the services and the housing. This is what we've talked about. Services only grew 0.1% on a month-over-month basis. They're still growing 5% on a year-over-year basis, so that's not great. We would like to see that much lower, but only growing 0.1%. So that was pretty good. Owner's equivalent rent We've tended to see, you know, four-tenths, five-tenths, six-tenths on a month-over-month basis. We got 0.3% for the month, so that is good news as well. That's the lowest month-over-month pace that we've had since April of 2021. Still growing over 5% on a year-over-year basis, but again slowly getting down to what the Fed wants to see. So markets loved this.

Yesterday had a great rally, we saw some rotation out of the tech stocks, bond yields were down and this morning we came in to get the I guess you could say sister report to this the producer price index, and unfortunately producer prices came in hotter than expected. So on the headline level, the economists were looking for 0.1%. It came in at 0.2. When you strip out food and energy, economists were looking for two-tenths. It was up four-tenths. And when you look at the ex-food and energy on a year-over-year basis, it's now 3% compared to last month being up 2.3. So not the right direction from the producer standpoint. Some of those things are similar story. It was all energy and goods related but services are still growing. Actually, services prices jumped up 0.6% and are growing 3.5% on a year-over-year basis.

Now, this report today didn't do much to the expectation for Fed rate cuts. There is some people starting to price in the possibility of a July rate cut. I think that's highly, highly unlikely. I think this is completely. Even September is completely dependent on what happens with the next labor report, labor market report, and we'll get that. We won't get that until early August. That's all we have today. Thank you so much. Please like and share this podcast with friends or family, and if you would like to see any of our other podcasts, you can view them on verdence. com backslash podcast. Thank you.