3 reasons May CPI shows inflation trajectory set to "undershoot" consensus in coming months = stickier Fed pause

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Yesterday’s May Core CPI was an “inline” reading at +0.44% vs Street +0.4%, but despite inline/slightly hot CPI, we saw equities broadly rally yesterday. To us, this is evidence of the drastic offsides positioning of investors, retail and institutional. But there is also a positive inflation story in yesterday’s CPI report and I want to highlight this:

• First, next month, the huge June 2022 CPI reading (+1.2% MoM) gets dropped from the YoY basis, and as a result, June 2023 CPI YoY could fall to as low as 3.0% vs May 2023 4.1% YoY. Headline inflation is what matters to the public and White House (thanks Tom Block) and this 3.0% reading is what investors will see against a Fed funds of 5.25% now. Sort of argues for a July pause too…no?
• Second, of the +0.44% May Core CPI MoM, 3 components were +0.43% of that total. Yes, 3 components literally explained core inflation in May:
  – Shelter +0.22%
  – Used cars +0.15%
  – Car Insurance +0.06%
• Do we really believe automotive related inflation as central to the Fed’s war on inflation? The Fed can see through that. And as for shelter, we know this figure is statistically lagging. Ex-shelter, the sticky CPI is now at 2.5% 3M SAAR (3 month annualized). Sort of seems on target. Right? Thus, digging into the Core CPI details, we see the fingerprints of a July pause.
• Third, now 42% of the CPI basket is in outright deflation, up from 40% in April. This figure has decisively moved higher and above long-term trendlines, arguing to me that inflation is sustainably cooling:
  – May 42%
  – 10-yr avg 38%
  – 50-yr avg 30%

BOTTOM LINE: Wed is June FOMC and a critical day, but we buy the dip on a “hawkish pause”

The June FOMC rate decision is released today at 2:00pm ET and we expect the Fed to pause. There is a risk this is a “hawkish” pause as the Fed could be troubled by the 15% rally in equities YTD. This is possibility:

• could a “hawkish pause” cause a local top in stocks today, particularly during presser? Yes.
• would we buy a 5% pullback in stocks? Absolutely
• but we also believe seeds of a July pause are in play for the 3 reasons noted above
• More CEOs are becoming vocal about economy “bottoming” as Morgan Stanley CEO notes below (see @carlquintanilla tweet).
• BofA fund manager survey shows the flip as more fund managers expect EPS to grow next 12 months
• Doesn’t this feel like we “slipped into an expansion”?
• Yes the latest BofA Fund Manager Survey shows fund managers massively underweight equities. This is why we “buy the dips” in coming months.

Reason #1: Headline Inflation YoY set to tank as we drop the huge June 2022 CPI

Next month, the huge June CPI is dropped. We highlight this below.

And this means the YoY will drop by as much as 100bp in June 2023 (next month) vs May 2023 CPI. Wow.

Reason #2: 3 components drove 0.43% of the 0.44% Core CPI MoM rise

Of the +0.44% May Core CPI MoM, 3 components were +0.43% of that total. Yes, 3 components literally explained core inflation in May:

• Shelter +0.22%

• Used cars +0.15%

• Car Insurance +0.06%

Do we really believe automotive related inflation as central to the Fed’s war on inflation? The Fed can see through that. And as for shelter, we know this figure is statistically lagging.

Ex-shelter, the sticky CPI is now at 2.5% 3M SAAR (3 month annualized). Sort of seems on target. Right? Thus, digging into the Core CPI details, we see the fingerprints of a July pause.

Reason #3: 42% of the CPI basket is in outright deflation above 50-yr avg of 30%

With the May CPI, now 42% of the CPI basket is in outright deflation, up from 40% in April. This figure has decisively moved higher and above long-term trendlines, arguing to me that inflation is sustainably cooling:

• May 42%

• 10-yr avg 38%

• 50-yr avg 30%

ECONOMIC CALENDAR: FOMC key in June

Key incoming data June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI
• 6/14 2pm ET April FOMC rates decision
• 6/16 10am ET U. Mich. May prelim 1-yr inflation
• 6/27 Conference Board Consumer Confidence
• 6/30 8:30am ET May PCE

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

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