TTYL Inflation; Welcome Recession

We have presumably reached peak inflation, as Wednesday’s July CPI report was unchanged month to month, but remained 8.5% YoY. This marked the end of a 16-month streak of monthly gains for CPI. Everyone can breathe a sigh of relief (for now) that inflation may be on its way out (at least its steady gaining. Higher prices will be with us in perpetuity). In any case, yours truly made the now wildly outlandish claim that March CPI was peak inflation. Everybody gets one, right?

Price changes in both fuel oil (-11%) and gasoline (-7.7%) were the major drivers in the July MoM CPI impediment. I guess it really is the “Strategic” Petroleum Reserve after all. Used cars and trucks (-0.4%) and transportation services (-0.5%) contributed modestly to the slowdown as well. The largest gainers on the month were food at home (1.3%) and electricity (1.6%).

Consumers can find solace in the fact that we have likely seen peak rents at this point. The rent index jumped 0.7%, and owners’ equivalent rent rose 0.6%. The shelter index overall gained 0.5%, where it rose 0.6% in the prior month of June. The realtor.com June Rental Report also highlights that we have reached the inflection point in Median Rent vs. Median Rent YoY.

This month’s CPI report may be the beginning of a re-orientation of the supply-demand dynamics which have been exacerbated in every which way by exogenous factors: total global shutdown, massive stimulus, reopening, global war, economic sanctions…the list goes on. But that re-orientation isn’t necessarily a good thing, as I’ll discuss below.

In stunning fashion to us “seemingly” winning the fight against inflation, Wall Street went absolutely brazy. it was actually quite a sight to see, to be completely honest. The broader indexes gained multiple percentage points in Wednesday’s nuclear trading day.

But just as we are seeing the inflationary narrative reorient, and stabilize; that doesn’t exactly mean that we’re out of the woods just yet. Just as this CPI print doesn’t enhance the chances of a Fed pivot, it also doesn’t undermine the chances that the Fed will let off the gas. We could have nagging and persistent inflation throughout the remainder of the year. Corporate earnings have also come as a somewhat mixed bag, and can very likely get worse as the remaining two quarters unfold before us. The markets presumable optimism in today’s trading day is nothing short of a bear market rally.

The bond market continues to scream bloody murder, as just about everyone and their mother is preparing for waaaaaay more Fed intervention (not for the better). Because the Fed isn’t going to reverse course or intervene at a time when they don’t have to. And that time is ostensibly not any time soon…