NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Greater Confirmation Delivered?

July 11, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

We believe that more recent inflation data has been consistent with our view that a re-acceleration of prices in 2H 2024 is a lower probability and that the path of rates is likely to be in line or lower when compared with the Fed’s current stated expectations.

June’s U.S. CPI was the cool breeze that investors and policymakers were hoping for to cut the heat of the summer and to likely give the Federal Reserve (Fed) the “greater confirmation” it has been seeking as the catalyst to ease policy in 2024. U.S. headline CPI was reported down -0.1% month-over-month and up +3.0% year-over-year, versus expectations of +0.1% and +3.1%, respectively. Core CPI also came in softer than expected, up only +0.1% (rounded from +0.065%) month-over-month and up +3.3% on a year-over-year basis.

The decline in headline CPI for the second month in a row was driven in large part by a drop in gasoline prices, which decreased another -3.8% in June after dropping -3.6% month-over-month in May. Food prices, for their part, were up +0.2% month-over-month in June as four of the six grocery categories were higher in the month. More notable was the increase in food away from home, which rose by +0.4% month-over-month in both May and June, and is up +4.1% year-over-year. We believe this is particularly important as data from food service establishments is indicating a shift toward value consciousness by their customers with continued cost increases potentially resulting in lower traffic and tickets going forward.

Given the volatility in food and energy, the focus, as always, was on the core CPI print, and that came in better than expectations as well. Shelter data finally exhibited some long-anticipated signs of moderation in June, up only +0.2%, with both rent and owners’ equivalent rent (what homeowners could rent their residence for) up +0.3%, levels not seen since August 2021. We believe this is particularly important as shelter is up +5.2% year-over-year and has accounted for nearly 70% of the increase in core CPI over the last 12 months. Also softer were medical care (up only +0.2% month-over-month) and airline fares (down -5% likely on increased competitiveness by carriers to capture the increasing number of summer passengers). Auto prices were also lower with used car prices falling by -1.5% and new cars down -0.2% on a month-over-month basis. Offsetting in small part the improvements were an increase in auto insurance of +0.9% month-over-month and an increase in household furnishings and operations of +0.5%.

Against this backdrop, the past two weeks have seen much discussion of the Fed’s dual mandate. Fed Chair Jerome Powell, in particular, acknowledged that should the disinflationary trend resume, the Fed’s attention would pivot to the state of the U.S. labor market. While the labor market has admittedly shown signs of softening recently, jobless claims released this morning came in lower than expected at +222k versus +236k. We believe that more recent inflation data has been consistent with our view that a reacceleration of prices in the second half of 2024 is a lower probability, and that the path of rates, if indexed more strongly to the labor market, is likely to be in line or lower when compared with the Fed’s current stated expectations. We believe there will be two rate cuts in 2024; the Fed’s dot plot, released in June, currently points to only one.

Not surprisingly, Treasury yields are meaningfully lower across the board following the release. While this news was well received by U.S. equity markets, stocks were trading close to flat mid-morning following a strong move higher thus far in July. The CME FedWatch tool is now reflecting an over 80% probability that the Fed delivers a rate cut in September.

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