"S&P futures are little changed as traders digest the August CPI report," reads the headline on our website this morning. Which makes perfect sense. While there were plenty of interesting developments in the most widely followed inflation gauge last month--core was higher than expected! "Super core" came in hot!--none of it matters right now the way it once did.
Economist Julia Coronado summed it up best: "Setting aside monthly volatility, the story is that we have exited the regime of high inflation, core goods and core services ex-housing are at pre-pandemic run rates, and housing is starting to cool," she tweeted. Rents--a major inflation input--have been dropping already this year and a glut of inventory is about to hit the market. Home prices have steadied since the sharp pandemic run-up.
The benchmark 10-year Treasury yield did jump to 4.35% right after the numbers hit this morning, but has since receded. As Andrew Brenner of Natalliance observed in a client note, "everyone knows oil is up 10% in the last two weeks...the Fed is still pausing next week. Time to now focus on the economy."
That last part is the key feeling in markets right now, and the reason why inflation numbers are starting to take a backseat to more crucial cyclical data like jobless claims. Just as it seemed that the "no recession" camp was victorious--with forecasters like Bank of America throwing in the towel on their recession call, and stock market strategists scrambling to raise their year-end targets--macro concerns are coming back to the forefront.
Case in point is the nervousness around GDP, which a month ago garnered tons of attention when the Atlanta Fed's current-quarter estimate hit nearly 6%. Now making the rounds is the fact that the St. Louis Fed's estimate is running at negative 0.25%. This forecasting gap also comes at a time when the two main U.S. growth gauges--GDI (for income) and GDP (for production)--have been unusually divergent, with GDI underperforming and raising concerns about the true strength of this economy.
If we do slide into recession after all in the months ahead, it seems unlikely that high inflation will remain persistent. Even if pilots and freight and auto workers have secured double-digit annual wage gains for the next few years, layoffs and softness in the larger services sector will undermine the broader wage hikes that have been driving "super core" inflation and been a feature of the post-pandemic economy. Certain goods sectors, like packaged foods, could be at risk of outright deflation.
A year or so from now, if the economy is much weaker but inflation is still running hot, then CPI (and PCE) reports could take a front seat once again. Alternatively, if growth proves more resilient and we do skirt a downturn, as Goldman Sachs is predicting, sticky inflation may also bear closer scrutiny.
But for now, the trillion-dollar question is whether and when the business cycle downturn will materialize, and data that can help answer that question are more important than the inflation numbers. For now.
See you at 1 p.m!
Kelly
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