Macro: Sandcastle economics
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FX Update: Scorching US June CPI print puts Powell in the hot seat.
John Hardy
Chief Macro Strategist
Summary: The US June CPI report came in far hotter than expected at both the core and headline, setting a new high bar for the cycle. While some will point to the especially large contribution from the used cars and trucks category to the higher than expected reading, a number of other categories have shown strong rises in recent months and the Fed is at risk of having to make a course correction the market is far from prepared to absorb.
FX Trading focus: Hot US CPI data prompts fears of Fed course correction
US June CPI facts: headline was +0.9% MoM and +5.4% YoY vs. +0.5%/+4.9% expected and vs. +5.0% YoY in May. The Ex Food and Energy CPI was +0.9% MoM and +4.5% YoY vs. +0.4%/+4.0% expected and vs. +3.8% YoY in May.
A short update today as the heat in today’s US June CPI report requires at least a brief comment – see the full table of the numbers in the official BLS report below. The bottom line: this number is too hot to ignore and the market is right in reacting quite strongly to it, as it strongly raises the risk that the Fed will need to move soon to get ahead of fears that this inflationary spike will prove far larger than previously anticipated, and may not be as transitory as the recent “Goldilocks” backdrop of lower long US yields and forever higher risk asset prices suggested.
In reaction to the data, the EuroDollar short-term interest rate futures are pulling back forward the anticipated first Fed rate hike, though in the case of the December 2022 EuroDollar contract, to take an example, we are still about four ticks/basis points away from the lows posted not long after the June 16 FOMC meeting that sparked the recent US dollar rally. The greenback itself is rising sharply and EURUSD is close to touching the recent lows below 1.1800, while AUDUSD is in a similar spot, with its recent lows near the pivotal 0.7400 area, while the next keys for EURUSD are perhaps 1.1775 and then the 1.1704 low from March 31.
This data not only generally sets the market a bit more on edge, but increases focus on everything inflation related from here, including incoming data like the inflation expectations in the July flash University of Michigan sentiment survey release on Friday, but also anything anecdotal in the Fed Beige Book out tomorrow evening. It also puts Powell in the hot seat in testimony before Congressional panels tomorrow and Thursday, but also in general heading into the FOMC meeting the week after next as data like this raises the risk that the Fed will have to make an embarrassing retreat from its complacent stance on inflation and have to reach out soon to taper MBS purchases and perhaps even US Treasury purchases sooner rather than later.
Graphic: US BLS Consumer Price Index table for June
The official monthly publication of the US CPI from the BLS shows that a number of categories are contributing to the upside surprise in the CPI today. Sure, the “Used cars and trucks” category was once again a major contributor to the higher than expected figure and is running at levels that are hardly sustainable beyond the nearest term. But a few other categories have shown a cluster of high readings that bear close watching. Importantly, the shelter component could become a leader in driving inflation in months to come if the past lagging performance relative to house prices (which are soaring) holds. Even the last three months in that category are running at a 4.9% annualized clip. I have also circled food – note especially Food Away from Home (where workers are hard to find and businesses may have to bid up wages) – and apparel.
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