Wall Street Reacts To Today's "Glass Half-Full, Glass Half-Empty" CPI Report

As discussed (and previewed) earlier, headline inflation came in at a faster-than-expected monthly pace in August, leaving the door open for additional interest-rate hikes from the Federal Reserve, although some focused on the moderation in shelter CPI, which is why Sept rate hike odds actually dipped after initially kneejerking higher.

Despite some attempts to goalseek the CPI number as dovish, Supercore CPI accelerated again, with Bloomberg economist August Saraiva writing that the report confirms that the report "adds to concerns that the renewed momentum in the economy is reigniting price pressures" which of course is obvious if one just looks at the price of oil rising to a new 2023 high every day. While Fed officials have been growing more optimistic they can tame inflation without a recession, a reacceleration in price growth could force them to push interest rates even higher — with the risk of sparking a downturn in the process.

For those who missed it, CPI rose 0.6% from the prior month, the most in more than a year, and was up 3.7% from a year earlier, more than expected. Core prices climbed 0.3% on a monthly basis - more than forecast - and were up 4.3% year on year. In other words, as Bloomberg puts it, inflation is still running warmer than the Fed would like.

• Overall, the single biggest contributor to the monthly gain in CPI was gasoline, which accounted for more than half of the increase. Shelter costs also kept pressure up, advancing for the 40th straight month and bypassing economist expectations for this category to slow. There were also notable increases in airline fares, auto-insurance costs, new cars and food prices.
• Stock futures and Treasuries initially slid, but then recouped losses. Contracts on the S&P 500 were flat as of 9:05 a.m. after dropping as much as 0.4%, while two-year yields were down about 2 basis points, at 5%. Interest-rate futures suggested that bets continue to be divided on whether the Federal Reserve will hike one more time this year.

The report complicated the picture for Fed policymakers, who meet later this month to set rate policy. While they’re likely to look through a temporary bump in energy prices, the shelter component is still running hot and gains across other categories could give them pause. The broader economic picture could also support another hike: The labor market, while showing cracks on the margin, remains tight

Commenting on the report, Fed mouthpiece Nikileaks, aka WSJ reporter Nick Timiraos said the report was mixed:

The glass is half full view of this inflation report is that any of the last 3 months of core inflation have been the mildest such readings since September 2021. The glass-half-empty view is that August core CPI wasn't quite as low as the last two, and a touch above expectations.

Below we excerpt from several of the more notable kneejerk reactions by Wall Street economists, strategists and traders to the CPI report :

Ellen Zentner, chief economist at Morgan Stanley

“The three-month annualized pace for core CPI moved from 3.1% to 2.4%. We think the Fed will keep rates on hold at the September FOMC meeting next week and the data following the September meeting will keep the Fed from hiking further.”

Peter Tchir, chief strategist at Academy Securities

"CPI, in grand scheme of things, a non-event. Yes 0.278% rounds to 0.3% on core, which is up a touch, but you have to go back to Aug 2021 to get a lower print (other than the prior two months). Sticky inflation seems real, but everyone knows (by its name) that it is sticky, so not sure Fed does much about it any time soon"

Dominic Konstam, chief strategist at Mizuho Securities

“Inflation optimists can stay optimistic, pessimists though won’t shift given the supercore acceleration.”

Julia Coronado, former Fed staffer and founder of Macro Policy Perspectives

"Slight upside surprise on core inflation with volatility in airfares, setting aside monthly volatility the story is we have exited the regime of high inflation, core goods & core services ex housing inflation are at pre-pandemic run rates, housing starting to cool"

Steve Sosnick, chief strategist at Interactive Brokers

“This is as close to an in-line number as we can get, Sure, the core was 0.3% vs 0.2%, but the fact that YOY is 4.3% tells us that it’s more the effect of rounding (it was 0.027% to 0.3%).”

Robert Tipp, chief investment strategist at PGIM Fixed Income

"While this print indicates good progress, there will still be some anxiety as to whether this drop in inflation is transitory. The Fed may not feel good about it until they see six or nine months of downtrend."

Greg McBride, Chief Financial Analyst at Bankrate

“If recent increases in gasoline and other energy costs are sustained, it could feed through to prices on a broader range of goods and services.”

Rob Waldner at Invesco

"The rise in real yields - up from 1% since April — favors putting more money into the sector as the market is making a top amid a growing risk of a potential slowdown in 2024."

Capital Economics

“Overall, there is nothing here to change the Feds plans to hold interest rates unchanged at next weeks FOMC meeting, and we still expect weaker economic growth and a continued normalization in the labor market to help drive a sharper fall in core inflation over the next 12 months than most others expect.”

Anna Wong, chief US economist for Bloomberg Economics

"The positive surprise in August’s core CPI is due to one single category – transportation services. In other areas – particularly used cars and rents – there were negative surprises. This report poses multiple dilemmas for a Fed that’s likely to hold rates steady at next week’s FOMC meeting.“We think the Fed is likely to look through the energy-price increase, but it’s not clear they’ll do the same for the increase in transportation services – after learning the hard way in 2021 that they shouldn’t dismiss potentially sticky inflation coming from a single category. Our baseline is still for the Fed to hold rates steady after September, but the risk of a rate hike in November has increased."

David Russell, Global Head of Market Strategy at TradeStation.

“Today’s inflation report looked worse than it was. Headline and core were a little hotter than forecast, but shelter rose at the slowest pace in two years. Most of the contribution from the high reading came from energy and a surprise pop in airline fares. Used car prices also came down, which is encouraging for core. These numbers confirm the trend of lower shelter costs that market bulls want to see. But they’re not decisively low enough to trigger a rally. Keep the champagne on ice and wait for next week. The Fed meeting is more important than ever. Policymakers will have to decide what to do with these numbers.”

Ben Jeffery at BMO Capital Markets

“The Fed won’t be hiking next week, but particularly given the strength in supercore, November is still very much a ‘live’ rate decision.”

Nigel Green, CEO of deVere Group

“This latest US CPI data is unlikely to move the needle on the Fed’s highly anticipated move to hold rates steady at their meeting next week. But the uptick in inflation gives the US central bank extra reason to be hawkish moving forward. As such, we also expect the Fed will start to prepare the market for a rate increase at its November meeting.”

Seema Shah, chief strategist at Principal Asset Management

The inflation print likely is not enough to tilt next week’s Fed call towards a hike. But at the same time, it has not provided clarity when it comes to the November meeting. "The rise in headline should come as no surprise given the recent run-up in energy prices and the Fed will likely look through the number. But the general expectation was that core inflation would remain stable, if not decelerate this month, so the upside surprise probably leaves the Fed with bad taste in its mouth and keeps it wondering if they still have more work to do.”

Michael Pond, head of global inflation-linked research at Barclays

“While core surprised by rounding up to 0.3% month on month, the upside was largely from a reversal in airline fares, which had been too weak in June and July. This miss is unlikely to change views about to path of inflation.”

Florian Ielpo of Lombard Odier Asset Management

“This inflation report places the Fed in a more comfortable wait-and-see situation: the marginally higher-than-expected inflation comes from the evolution of energy prices – nothing the Fed should be worrying too much about at the moment.”

Phillip Neuhart, director of market and economic research at First Citizens Bank

“August saw a gain in core inflation, while increased gasoline prices helped push headline inflation even higher compared to the prior month. The Fed is likely to keep the federal funds rate unchanged at this month’s meeting, but today’s report keeps alive the potential for another interest rate hike in coming months.”

Source: Bloomberg, primary sources