The latest major updates on US inflation have just come out, bang in line with consensus expectations.
First off, on Wednesday the Headline CPI (Consumer Price Index) for July fell to 3.4% from 3.5%, while Core CPI (which excludes food and energy) edged down to 2.5% year-on-year, from 2.6% previously.
The US dollar sold off a bit while stock index futures headed higher, but both these moves had unwound within an hour or so.
Then, the following day, July PPI (wholesale inflation) came out at 4.2% year-on-year, down from 4.7% previously.
Despite the relative indifference demonstrated by traders in the immediate aftermath of both releases, the CME’s FedWatch Tool showed that the probability of the Fed leaving interest rates unchanged at its next monetary policy meeting in mid-September rose to 68% from 50%.
The likelihood that there will be at least one 25-basis point rate hike before the year-end dropped to 68% from 78%, which is still quite significant.
But this month’s updates take no account of the rally in oil prices since the beginning of July as the US and Iran effectively tore up their memorandum of understanding agreed in June.
Perhaps it’s reasonable to assume that some tightening in monetary policy this year is a distinct possibility.
On top of this, it’s worth noting that all major US inflation measures continue to hold above the Fed’s 2% target.
This includes Core PCE (Personal Consumption Expenditures), which, before Kevin Warsh took over as Chair in May, was the Fed’s preferred inflation gauge.
No wonder then that members of the Fed’s FOMC (Federal Open Market Committee) continue to focus on the ‘price stability’ half of the Fed’s dual mandate.
Yet it also looks as if the other part of the mandate, ‘maximising employment’, is becoming an issue.
The latest Non-Farm Payroll update, released on the first Friday of August, was dismal.
Payrolls fell 23,000 in July, which was significantly below expectations of a gain of 85,000 jobs.
Not only that, but there were downward revisions to the previous two readings of over 100,000.
Now, if this was a single disappointing release, no one would be paying it much attention.
But July’s poor reading followed on from a significant downside miss to forecasts from June as well.
Is it possible that these payroll numbers are pointing to some economic weakness in the US economy?
It’s worth pointing out that the government payroll data is notoriously volatile and subject to future revisions, both up and down.
But given the exceptional earnings growth that companies have been announcing during the ongoing second quarter results season, and given that US consumer spending still accounts for around two-thirds of US economic growth, could it be that earnings growth may begin to top out soon?
So far, it looks as if the staggering amount of money being spent, with more pledged, on AI-related data centres and other infrastructure, is providing a huge tailwind for equities.
This would appear to be the main reason that US stock indices are trading at, or near, their all-time highs. Where now?
The S&P 500 continues to consolidate around the all-time high hit earlier this month.
Is this a warning that the index is losing its upside momentum, or is it simply regrouping ahead of another push higher?
It’s difficult to know. But it’s also fair to say that dips continue to be bought and that the market has a habit of responding positively to economic data and geopolitical events, even if the news isn’t particularly good.
On the other hand, the rally is very long in the tooth, and many of the corporations leading the advance are priced to perfection.
Nevertheless, there’s no law that says equities can’t continue to rally from elevated levels, especially if investors have no concerns that they may be buying at the top of the market.
(This is a fortnightly column by David Morrison. He is a Senior Market Analyst at Trade Nation. Views are his own.)
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