So, you remember that scary inflation beast we've been dealing with? That's been making shit more expensive and scaring investors out of the market. It looks like it's finally chilling the fuck down. However, market participants do keep their eyes on it, and rightfully so.
We're seeing inflation continue to slow down. We're talking about a 0.1% increase from last month and a 4.0% increase from last year, which is the slowest it's been since way back in March 2021.
Remember all those one-time price spikes that made things like gas, food, used cars, and new leases more expensive? Maybe that's finally starting to fade into the background and isn't skewing our comparisons anymore.
While we aren't ready to pop the champagne yet, for now, it seems like inflation is slowing down (Not that things will be cheaper, but become do become more expensive but at a much slower rate) unless something crazy happens in *cough Russia* and the CPI number goes higher than the +1.2% it was in June 2022, we've got a pretty good shot at seeing inflation drop to 3% or maybe even lower next month. So, we're definitely looking at some sunny days ahead, at least until this good vibe starts to wear off.
Btw I'm writing this in a rush, don't judge lmao (also try to ignore spelling mistakes etc. I didn't had much time today)
US Core Inflation Anxiety
While the overall inflation beast is chilling out, its sidekick, 'US Core Inflation', has been stubbornly stable for the past 6 months, with a monthly print hanging around at ~0.4% increase, which works out to a 5% increase over the year.
Now the government and Federation of Retarded Reptilians are playing a bit of 'make-believe' with the numbers to make them look nicer. They might, for instance, ignore the cost of rent and only look at new leases, or they might take out the prices of used cars from the equation. These little tricks can make the core inflation figures seem a bit more tolerable.
But here's the thing: when you stick to the standard way of measuring, core inflation is sitting at around 5%. That doesn't quite match up with the inflation target rate of 2%.
Despite some improvements, like the fact that unemployment is near historic lows, the lack of clear progress is going to make some members of the Federal Open Market Committee (FOMC) a bit uneasy. The hawks, who want to keep hiking rates to keep inflation in check, will probably be a bit worried about this.
This whole inflation story doesn't seem like it's going to cause a big shift in what the central bankers decide at their meeting today. The market thought there was about a 25% chance they'd raise rates, but that's dropped to just below 10%.
So, it looks like the consensus is to 'skip/pause' - or, for now.
But here's a plot twist. There's a feeling in the air that they might hike in July. That means they might increase rates then, with about a 60% chance of that happening, according to the market.
And in a bit of a side plot, short-term US Treasury securities (USTs), specifically the ones that mature in 2 years, have been under some pressure. They're currently offering a yield of 4.65%.
Market participants are scaling back their expectations of any interest rate cut happening soon.
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Today's FOCM meeting
I think I agree with the market that they keep the target range for the federal funds rate the same, between 5.00-5.25%. But it's not going to be an easy day for the Chair, Jerome Powell. He's got a bit of a divided crew on his hands. His own take is to keep things steady because he believes the Fed can afford to be patient right now. But getting everyone else on board with that might be a bit of a struggle.
The members who want more rate hikes on the Committee agree with him, he might hint that they could raise rates in July. There's likely to be at least one more hike of 25 basis points (or 0.25%) this year.
So, with the Committee pretty split and Powell pushing for a pause in June, it's looking like the most likely outcome is a temporary hold on rate hikes, followed by a possible hike in July. Even though one month's worth of extra data might not change the big picture, Powell's early suggestion of a June pause means that recent data, like the May Employment Report and yesterday’s CPI, could have a bigger impact on the decision for July.
Even though we previously thought the Fed would keep rates steady after the May meeting, the economy's resilience and the small impact of some banking issues have led us to think they might resume rate hikes in July to keep inflation in check.
There could be one rate hike of 25 basis points, then a pause until the end of the year. But if a recession is delayed and inflation stays high, they might need hike more
There are also two other big releases today.
First up are the Eurozone's industrial production numbers for May. These will show how much production has bounced back from the big drop in April, which was mostly due to some wild swings in Ireland. Despite better energy conditions than last year, actual industrial production in the euro area, excluding Ireland, is still about 0.4% below what it was before the pandemic.
The other big release is the May US Producer Price Index (PPI), which is expected to be 1.5% year-on-year. This trend of easing producer price inflation continues, thanks to falling commodity costs and better supply chains.
Finally, analysts expect the People's Bank of China (PBoC) to soon cut its 1-year medium-term lending rate by 10 basis points to 2.65%. This comes after they surprisingly cut the 7-day Reverse Repo Rate to 1.90% on Tuesday.
That's because the momentum from easing Covid restrictions is starting to fade, and China doesn't have the same high inflation problems as Western economies. This gives the PBoC room to maneuver, and we expect another 10 basis point cut in the third quarter.
But unless China changes its economic model, which favors government and business investment over consumer spending, it's hard to see how this would boost domestic consumption.
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