7/12/24 – CPI confirms bond market rally
The highlight of the week was FOMC Chairman Powell’s dovish testimony on Capitol Hill. In describing the dual mandate of stable jobs and low inflation he said inflation has shown “modest further progress” and that labor markets had cooled “considerably.” We interpret that as meaning that a rate cut has once again been moved to the front burner of the FOMC’s agenda.
The consumer price index offered some good news to the market, coming in at a 3.0% year-over-year rate, and falling -0.1% versus the previous month’s reading. Recall that bond investors became nervous when the year-over-year index ticked up to 3.5% in March. The most recent University of Michigan 1-year inflation expectations is also good news, ticking down to 2.9% from 3.0% at the last reading.
The producer price index bucked the trend, ticking higher in June, but that did little to move the market. For the week, the 2-year note is 13 basis points lower, and the one-year Treasury bill bond equivalent yield slid to 4.86%. The equity market was cheered by the prospect of a nearby rate cut with the S&P 500 touching an all-time high on the day of Powell’s testimony and closing the week at a new record high. While interest-rate sensitive stocks reacted positively to the news, the outlier was the index of home builder stocks, rallying over 10% for the week.
With the next open market committee meeting a little over two weeks away, we don’t think the committee will make a move this month, but September is a distinct possibility. With rate cut talk coming back to the fore, action in the fed fund futures market is again heating up. The December contract is now pricing in a Fed Funds rate of 4.83%, implying two rate cuts by the end of the year.
The highlight of next week’s economic data is likely to be retail sales, to be released on Wednesday. Economist are forecasting that retail sales continued the recent slump and fell 0.2% versus the May reading. That’s not going to bode well for Q2 GDP which is to be released the following week.
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