Despite a flat out bad June CPI report, equities starting to see “less bad”
In the 36 hours since the horrific June CPI report, equities have managed to better with Technology stocks managing gains.
- initial “hawkish” market reaction was to price near 100% odds of +100bp for July hike
- but as the Fed funds futures chart shows, this was reversed during the trading session Thu
- this is the first sign, in our view, of a change in the Fed’s reaction function to “measured”
- unlike the May CPI (June 10th release) where Fed made “expeditious” move to +75bp (from +50)
- Fed officials seem far more measured in their reaction to June CPI
This is change, in our view, that should be favorable to equities. If the Fed moves towards a “measured” approach, instead of “expeditious”, this means fewer negative shock to markets.
- and if incoming data starts to support a weakening inflation narrative
this further supports equities re-rating higher
Fed’s Waller and Bullard made “measured” comments today
Two Fed governors made comments today and as highlighted below, their statements are “measured” in their reaction to the horrific June CPI print. Bullard is St. Louis Fed President. Waller has been on the Board since 2020.
- neither seem supportive of +100bp
Gasoline worst “offender” in June CPI, but revenge travel, supply chain tightness and cars still bad
Underneath the hood, the June CPI was bad overall, but as shown below, the worst offenders were:
- Revenge travel –> airline + hotels >20% YoY
- Cars +10% YoY
- Furnishing +10% YoY
- but many items are elevated (see chart below) but the worst offenders are above
The leading indicators for many of these items are already rolling over. We highlighted this earlier this week including high-frequency measures of travel (hopper.com), manheim (cars) and piling inventories for retailers.
Gasoline was the worst and ultimately impacts most of the economic activities
But the biggest negative shock in the June CPI in Energy. As shown below:
- Motor fuel (gasoline) accelerated its contribution to headline CPI
- June was +2.30%
- May was +1.85%
- March was +1.74%
Gasoline, in other words, on a year over year basis, is contributing more to CPI than anytime since the start of the pandemic.
Not that this is all that important, but excluding gasoline, headline CPI actually peaked in March 2022. The chart below highlights this. But the obvious pushback is the 6.76% YoY is still too high.
Oil and Gasoline futures tell us retail gasoline has a long way to fall…
As Steve Liesman, CNBC Economist likes to say, gasoline rises in an escalator and falls down a feather. And this is shown below where retail gasoline is down 8% while crude oil is down 31%.
And as analysis by our data science team, led by tireless Ken, shows, gasoline futures and retail gasoline have basically 100% correlation over time. At least since 2005.
- this implies AAA retail gasoline is likely to fall to $3.84 in the next few weeks
- retail gasoline is $4.60 today.
- this is nearly a 20% further drop
Gasoline might be “deflationary” in July if 9 prior oil declines are precedent
The June CPI was “ugly” and an upside surprise. The YoY was +9.1% versus consensus +8.8%.
- Motor fuel (gasoline) was the single biggest driver of upside surprise
- YOY: +2.3% of the +9.1%
- MOM: +0.55% of the +1.3%
- No surprise, this is also the single biggest driver of consumer perceptions of CPI as well
CPI: Top 20 contributors to YoY
Oil is down >25% from the peak, why is fuel lagging?
Oil is down >25% from its peak and is back to pre-Russia Ukraine levels. And this happened in June. Many expected this to show up in the June CPI.
- as shown below
- for the month, oil was down 4% (spot to spot, not average)
- but motor fuel showed a +11% month over month
- this is a huge 1,500bp differential
Since 1980, gasoline CPI lags oil moves by median 1 month…
There have been 9 instances of oil rolling over meaningfully since 1980. Take a look below.
- we flagged >20% drawdowns in oil
- CPI Motor fuel (Gasoline) lags are highlighted
- median is 1 month
- this implies July CPI motor fuel will reflect the >25% drop in oil prices
