INTRADAY ALERT: Aug Core CPI better than appears. Fed has "green light" to start easing cycle. But 8 week malaise still dominant force.

Tom Lee, CFA
INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.
INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.
INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.

The August CPI release today is better than it appears. Core CPI came in at +0.28% MoM, which is well above Street consensus of +0.20%. On the surface, this is 8bp (+0.08%) hotter, but let me explain why this doesn’t change the fact that inflation is indeed cooling fast.

  • The 5 biggest contributors (CTG) to Core CPI MoM:
    – parenthesis is prior month (July)
    – Shelter ex-hotels +0.21% (+0.17%)
    – Airline fares +0.04% (-0.02%)
    – Lodging, other +0.03% (+0.00%)
    – Auto insurance +0.02% (+0.04%)
    – Tuition +0.01% (+0.01%)
  • Notice the drastic acceleration of Shelter, Airlines and Lodging?
    – Collectively, versus July, these 3 components
    – Added +0.13% MoM more
    – Meaning, of the +0.12% MoM rise vs July
    – These 3 were the entire sequential increase
    – Wow
  • Did inflation suddenly accelerate in Shelter and airline fares? We don’t think so. And the fact is this looks more like seasonal-adjustment noise.
  • As for auto insurance, this is starting to finally slow down. The YoY peaked at +22% earlier this year and now stands at 16.5% (18.6% July). Thus, the worst of this component is finally fading.
  • Overall, to us, this CPI report is consistent with inflation on the glidepath to 2%. Sure, there will be hawks saying this was a surge in August. But really? Does anyone really think inflation is surging again?
  • The Fed is still expected to cut next week and start an easing cycle.
    – But the odds of +50bp cut stands at 20%
    – It was 33% as of Tuesday close, so market sees lower odds
    – We think 25bp or 50bp is still a dovish pivot for Fed

Bottom line, a good August CPI report but we are in the bad 8 weeks

We are still in the bad 8 weeks until election day.

  • The Presidential debate last night was a win for Harris. And the election odds remain super tight, and too close to call.
  • This August CPI report shows progress, but the optics are not clean enough for markets to be decisive
  • This places a lot more weight on the Sept FOMC rate decision, which is next week (9/18)
  • Logically, to us, that is the date we think the market can start to breathe easier, even as we are still in the grips of the bad 8 weeks into election day (11/5)

INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.

INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.

INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.

INTRADAY ALERT: Aug Core CPI better than appears. Fed has green light to start easing cycle. But 8 week malaise still dominant force.

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