June CPI Report Comes In Hot, Fed Fund Futures Retreat After Initial Shock

The June CPI print came in at 9.1% on Wednesday on expectations of 8.8%. This was higher than expectations and the report did not give Fed officials any reprieve from persistently high price pressures. Shelter was problematic and so was gasoline. Hotels benefitting from revenge spending contributed as well. The initial market reaction was likely somewhat extreme in Fed Funds Futures markets which priced in a 100% chance of a 100-bps point hike. This level would be the largest single hike since Paul Volcker’s tenure. For their part, Fed officials seemed to be more measured in their reaction to this CPI report than the last one. Since the initial shock, the futures markets have retreated from 100% certainty that a larger hike was coming and now 75 bps is the most likely outcome for the Fed’s July meeting.

Fed Governor Christopher Waller had somewhat subdued comments given the print. In his comments, he mentioned he thought the market was “getting ahead of itself” in pricing in a 100-bps hike.  He said he supported a 75-bps hike but could be swayed by data in retail and housing if it surprised in the wrong direction to consider 100 bps. Surprisingly, St. Louis Fed President Bullard, often the leading hawk, said he believed 75 bps was still appropriate. However, you can bet that if data releases show demand isn’t being curtailed enough by current tightening efforts, Bullard could likely be convinced to hike by 100 bps as well. Waller also said that he was “feeling fairly confident that the US economy did not enter a recession in the first half of 2022.” He believes economic expansion will continue despite the Atlanta Fed’s GDPNow tracker suggesting that we may already be in a recession.

The retail sales mentioned by Waller did indeed come in above expectations on Friday morning. The market rallied as the continued strength of the consumer cast doubt on mounting fears of an imminent recession. While the rise was larger than expected, it was likely in the “goldilocks” zone. In other words, the spending gains alleviate fears of a painful recession happening in the near future, but were not likely strong enough to merit more aggressive action by the US central bank. Although the retail numbers aren’t adjusted for inflation, they still showed conclusively that consumer appetites for non-essential goods like consumer electronics and furniture remained healthy. There was a resurgence in online sales, but department store spending declined by 2.6%. The University of Michigan Consumer Sentiment survey also showed more strength than expected and continues to suggest that consumer inflation expectations are anchored. 

The Fed also released their Beige Book on Wednesday which includes information from surveys across the Federal Reserve’s twelve districts. While the release shows that the US economy is still in expansion there were some clear signs of rising anxiety over a slowdown in some districts. Economic activity expanded at a “modest pace” but evidence of conditions slowing was greater than in the last report.  However, the outlook for future economic growth was dimming. The survey also showed evidence of entrenched price pressures in areas outside of food and energy. Many companies expect the key price pressures they deal with in the course of doing business to persist through the second half.

The Federal Reserve’s inspector general exonerated former Vice Chair Clarida and current Federal Reserve Chairman Powell of any wrongdoing in the ethics probe related to their trading activities. Clarida had failed to fully disclose his trades. Powell’s financial advisor for his family trust had erroneously made trades during a blackout period around a late 2019 Fed meeting.  While Powell and Clarida have been cleared, the inspector general is still completing its investigation of the trading activities of Former Dallas Fed President Kaplan and Former Boston President Eric Rosengren.

Disclosures (show)

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

By continuing, you agree to the Terms of Service and Privacy Policy.

Already have an account? Sign In

Don't Miss Out
First Month Free

Trending tickers in our research

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

By continuing, you agree to the Terms of Service and Privacy Policy.

Already have an account? Sign In