CPI reflects a sizable beat on inflation
WHAT IT MEANS AND MOST IMPORTANTLY WHAT IT WILL MEAN WITH HOW THE FED THINKS ABOUT THINGS >> I WILL DO MY BEST ON ALL THREE. A SIZABLE BEAT ON INFLATION. PROGRESS IN BRINGING DOWN PRICE HIKES, BUT THERE’S A QUESTION ABOUT WHETHER THIS NUMBER WILL MEAN MORE TO THE MARKETS THAN IT DOES TO THE FED. HERE ARE THE NUMBERS WE ARE LOOKING AT 0.1% BEATING THE ESTIMATE OF 0.3% ON THE HEADLINE YEAR OVER YEAR, 7.1% VERSUS 7.3%, STILL HIGH THE CORE UP 0.2%, A TENTH LOWER THAN THE ESTIMATE, THE YEAR OVER YEAR FALLING 6.0% RATHER THAN
6.1% INFLATION IS COOLING FOR GOODS AND SERVICES THIS MONTH AND THE PRICES WILL COOL EVEN FURTHER IN 2023 FOR THE FIRST TIME WE CAN SAY THE FED IS WINNING ITS WAR ON INFLATION. HERE ARE SOME OF THE DETAILS OUT THERE. YOU HAVE A SURGE IN FOOD PRICES, UP A HALF A PERCENTAGE POINT, OFFSET BY A DECLINE IN ENERGY PRICES, A BIT MORE THAN EXPECTED USED CAR PRICES CONTINUE TO FALL BUT OWNER’S EQUIVALENT RENT, A KEY FACTOR DRIVING INFLATION, UP 0.7% SERVICES ENERGY A BIT HOTTER THAN THE HEADLINE OR THE CORE, SOMETHING THAT FED THEIR POWELL
HAS BEEN WATCHING. LOOK AT THE FUTURES MARKET NOW MARKED DOWN ITS ESTIMATE FOR THE PEAK FUNDS RATE FROM AROUND 499 BEFORE THE NUMBER, NOW IT IS TRADING AROUND 483 SO A SIZABLE
AND FED CHAIR JAY POWELL HE’S POINTED TO THE LABOR MARKET AS A MAJOR SOURCE OF INFLATION, SO HE MIGHT BE HAPPY ABOUT THIS NUMBER BUT NOT QUITE READY TO TAKE THE VICTORY LAP THE MARKET SEEMS TO WANT HIM TO TAKE AT THIS POINT, GUYS >> STEVE, THAT IS WHERE I WANT TO PICK UP BECAUSE YOU JUST TOUCHED ON THIS, BUT REALLY NOW ARGUABLY IT IS ALL ABOUT THE LABOR MARKET COOLING UNTIL THAT HAPPENS THE FED IS LIKELY TO BE HAWKISH, AND WE’VE HEARD THAT FROM BOTH CURRENT AND FORMER OFFICIALS LEADING UP TO THE PRINT WE
ARE GETTING TODAY OF COURSE, THIS FOMYC MEETING HAPPENING. WALK ME THROUGH WHAT WE SAW IN TERMS OF WAGES AND HOW IT SPEAKS TO THE RESILIENCE WE ARE SEEING IN LABOR >> MORGAN, FIRST OF AWFULLY WANT TO SAY PERSONALLY I WOULD LOVE TO PUT ON THE PARTY HAT HERE, YOU KNOW, AND SAY THIS IS DONE IT IS JUST MY CLOSE READ OF WHAT POWELL HAS BEEN SAYING SINCE YESTERDAY, IT MAY BE TOO EARLY FOR THE FOLLOWING REASONS. FIRST OF ALL, HE HAS SAID SEVERAL TIMES THAT THE FED IS VERY COGNIZANT AND FOLLOWING THE HISTORY OF THESE
THINGS WHERE THE HISTORY RAISED RATES IN THE ’70s IN RESPONSE TO HIGHER INFLATION, THEN BACKED OFF AND INFLATION SURGED AHEAD SO I THINK THEY’RE GOING TO WANT TO PUT A COUPLE OF BUCKETS ON THIS FIRE BEFORE WALKING AWAY AND DECIDING THAT THE FIRE ITSELF IS OUT. HE HAS POINTED, AS YOU SAY, MORGAN, TO THE JOBS MARKET AND THE TIGHTNESS IN THE LABOR MARKET AS AN ABSOLUTE KEY THERE FOR WHAT IS DRIVING INFLATION, PARTICULARLY THAT SERVICES, X HOUSING CORE INFLATION NUMBER WHICH IS UP 2% SO THAT’S A GOOD NUMBER, BUT I THINK HE’S STILL GOING TO
BE CONCERNED THAT HIGHER WAGES FROM A LABOR SHORTAGE ARE GOING TO WORK THEIR WAY INTO CPI AND INTO INFLATION. >> THE OTHER PIECE OF THIS, I KNOW WE TALK ABOUT IT ALL THE TIME, STEVE, BUT I MEAN JUST TODAY, RIGHT, YOU GOT THIS COOLER-THAN-EXPECTED CPI AND EQUITIES ARE RALLYING ON IT. THE S&P IS UP 2.25% RIGHT NOW. IT SPEAKS TO LOOSER FINANCIAL CONDITIONS EVERY TIME WE GET A DATA POINT THAT IS MOVING IN THE FED’S FAVOR TOWARDS THIS TACKLING INFLATION NARRATIVE HOW MUCH DOES IT COMPLICATE THE PICTURE? >> IT DOES COMPLICATE THE PICTURE AND IT
COULD POTENTIALLY GUIDE POWELL IN HIS COMMENTARY TOMORROW, AND FOR THAT YOU DON’T HAVE TO GO BACK TO THE ’70s FOR THE HIS HERE JUST GO BACK TO THE SUMMER WHERE THE MARKET BECAME EXUBERANT AGAIN AND POWELL FELT LIKE HE NEEDED TO AGAIN POUR A BUCKET OF WATER ON IT. THEN HE CAME OUT WITH THAT SHORT, SHARP AND SHOCK SPEECH IN AUGUST AT JACKSON HOLE WHERE HE BASICALLY SAID, I’M ONLY THINKING ABOUT INFLATION, INFLATION IS A BIG PROBLEM, I’M NOT HAPPY YET AND THAT REDIRECTED THE CONVERSATION MORE TOWARDS WHERE THE FED WANTED IT TO BE. HE’S
GOING TO BE CONCERNED I THINK AT SOME POINT THAT INTEREST RATES COME DOWN MORE THAN EXPECTED, MARKETS RISE MORE THAN HE WANTS THEM TO, SUCH THAT IT CREATES MORE STIMULUS TO THE ECONOMY. WE WILL SEE TOMORROW IF HE FEELS THE NEED TO REDIRECT — I THINK HE’S GOING — LOOK, THE BROOKINGS SPEECH LAST WEEK WAS A LITTLE BIT MORE DOVISH, THE MARKET TOOK IT THAT WAY. WE WILL SEE IF HE CONTINUES THAT, BUT I THINK HE’S GOING TO BE A LITTLE BIT MORE CAUTIOUS HERE ABOUT WHAT THIS NUMBER MEANS FOR THE OUTLOOK FOR INFLATION AND
FOR FED POLI
