NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: With Inflation in Line, Focus Shifts to Jackson Hole

August 14, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

We expect 2-3 interest rate cuts for the remainder of the year while continuing to recommend a review of cash positions with an eye towards reallocating outsized cash allocations to equities and/or longer duration fixed income in line with strategic asset allocation targets.

July’s U.S. CPI came in right in line and right on time for the Federal Reserve (Fed) as they look ahead to the Jackson Hole Economic Symposium in just over a week. U.S. headline CPI was reported up +0.2% month-over-month and up +2.9% year-over-year, versus expectations of +0.2% and +3.0%, respectively. Core CPI was up +0.2% month-over-month and up +3.2% on a year-over-year basis, in line with consensus.

Breaking down the data, the +0.2% increase in core CPI for the month was driven almost entirely by shelter costs which were higher by +0.4% on a month-over-month basis. In our view, this was somewhat disappointing as the measure had been running at +0.4% for much of the year but inflected down to +0.2% in June. Auto insurance was also hotter this month, with premiums up +1.2% month-over-month versus a +0.9% jump in June. Conversely, continued progress was exhibited in medical care costs (down -0.3% month-over-month), used and new vehicles (down -0.2% and -2.3% month-over-month, respectively), airline fares (down -1.6% month-over-month), and apparel (down -0.4% month-over-month).

We believe the print was noteworthy given the lack of surprise versus consensus; the variability in U.S. economic data points from forecasts this year has been a challenge for economists and investors as the Fed remains very focused on trailing data in their policy decisions. In addition, headline CPI at +2.9% year-over-year was the lowest level for that measure since April 2021 – a nod to the progress that has been made over the course of the current rate hiking cycle. With that said, coming on the back of a very light July PPI print yesterday – only +0.1% month-over-month and +2.2% year-over-year – today’s release could be perceived as a mild disappointment, whereas a +0.2% print several months ago would have likely sparked a rally in equities. Instead, equities are only incrementally higher to start the day and Treasury yields are essentially unchanged after dropping ahead of the release.

As for the Fed, a rate cut in September appears fully priced in, but the probability of a 50 basis point cut, which appeared all but certain only 10 days ago, has now fallen to less than 50%. While the narrative coming out of Jackson Hole will be important in terms of setting expectations for the path of policy shifts, the Fed will have both August CPI and non-farm payrolls going into their meeting on September 17th. We expect the emphasis will likely be on the latter with any meaningful acceleration in the path of rate cuts likely driven by a deceleration in the labor market. Our expectations are for two to three interest rate cuts for the remainder of the year, and we continue to recommend a review of cash positions with an eye towards reallocating outsized cash allocations to equities and/or longer duration fixed income in line with strategic asset allocation targets.

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