#USCoreCPIMissesExpectations

Everyone is cheering this CPI print – This is the trade I'm actually watching

The market rally on a CPI surprise usually warrants its own discussion beyond the data itself. Headline CPI was down m/m for the first time since Aug 2020, down from 4.2% to 3.8% y/y, core was 2.6% (down from 2.9%). Fed July hikes have pulled back slightly on the news, yields down – nothing unusual to the usual playbook.

What has happened in the hours after has been interesting though: first risk assets cheered on the headline, but some of that pop was surrendered when the actual details of the print started getting consumed. And to me, this is the bigger signal: that a market can rally on a headline, then give some of that back within the same day implies that smart money is repricing the details rather than just the summary number.

Because these details aren’t entirely pretty. Almost all of the month-on-month relief came from energy prices plummeting (partially due to the US/Iran ceasefire having put downward pressure on oil), but core inflation was remarkably sticky, barely moving, with Shelter around the 3.3% level, while insurance and new and used vehicles continue to run hotter. That’s the inflation that has no geopolitical component to it and won’t simply resolve itself because a truce in the Strait of Hormuz goes into effect.

I think my trade around this comes into play here – thisCPI relief is contingent upon lower energy prices, but oil prices have a habit of snapping back, especially considering some reports of renewed flare-ups around the Strait of Hormuz in the hours after this print. If we see energyPrices push higher in the coming weeks, June CPI print will look extremely anemic and all of this disinflation pricing could unwind very quickly indeed. TheFed is also unlikely to embrace a disinflationary Narrative based on such an obvious and easily reversible driver, particularly with the former Fed governor Warsh having been vocal against any claims of having ‘conquered inflation’ around the time of the speech where this was delivered.

I'm not going to be betting aggressively against this move just yet but I am not going to chase it either; this single print is far from confirmation of a disinflationary trend.

What are your trades and views for this CPI print – do you see it as a confirmation of disinflation or a false head-fake?

‍#FedRateDecision #MacroTrading @Gate_Square