The View from 5th Avenue – 10 August 2022

While economists expected another modest rise in inflation on a MoM basis, they did not expect headline CPI to slow significantly from 9.1% to 8.5% Yoy, ending a 16-month streak of gains. But what is in a CPI? Quite a bit, actually. Shelter costs (which continued to rise), food prices (which continued to rise), services inflation (which continued to rise), and energy and goods prices, which mercifully, slowed. But perhaps most importantly, was the real average weekly earnings which continues to plunge, (down 16 straight months) proving inflation has eroded wage gains. And yet. And yet. The market loved it, whether the drop in CPI was enough to signal a Fed pivot or not. Rate hike odds highlighted a collapse in tightening expectations and risk was back on today baby! Tech led the cause (as we quickly forgot misses from NVDA, MU, RBLX and COIN this week) while telecoms, staples and energy brought it up the rear. We are now through two technical levels– above the 4177/4200 resistance levels on the S&P and below 105.5 on the DXY. The dollar move signals a real change in the markets, and also could serve as a tailwind for companies who were hurt by USD strength this past quarter. As with risk on, so goes yields higher and it’s worth noting in the 10y auction indirect bidders took 74.5% of the print, the highest ratio since Feb. Finally, The Fed's Kashkari didn’t have anything new to say. The Fed will raise rates and sit there until inflation eases...they are unlikely to cut rates with a high CPI…they are still shooting for 3.9% by year end. Thus, the probability of a 50bp hike in September nearly doubled since yesterday. Investors have chosen to slice this as very positive for equities. After all, we are seemingly past “peak inflation.” But, with inflation still at 8.5%, it’s hard to see how that could be good for anyone.