May US CPI Data Gives Fed Confidence for June Pause
Economic news and commentary for June 13, 2023
US CPI
US CPI grew 0.1% MoM and 4.0% YoY in May, down from 4.9% YoY in April. The headline monthly slightly beats expectations and brings the annual rate of growth for consumer prices just short of the 3% region. The three-month average of monthly moves is now just 0.2% MoM. Tapering food and energy inflationary pressures have helped to cool the overall CPI readings. In May, food prices were up just 0.2% MoM after no growth in the last two months. The price growth of groceries continued to moderate with the food at home index up just 0.1% MoM and 5.8% YoY, down significantly from 7.1% YoY in April. Food away from home was a bit stickier because of its relation to the service sector. That index still grew 0.5% MoM and was up 8.3% YoY. Energy prices fell across the board again, repeating the deflation seen in March. The energy index fell -3.6% MoM driven by the -5.6% MoM decline in the gasoline index. The natural gas index (-2.6% MoM) and electricity index (-1.0% MoM) both fell as well. Downward pressure on energy prices is always a strong positive since it has a major impact on inflation expectations.
Core CPI inflation continued the streak of 0.4% MoM growth rates and made it five months at that pace in the last six. The moderation in the annual pace was small, down just -0.2 ppts to 5.3% YoY in May. Good prices have returned to putting upward pressure on core inflation. The goods index increased a strong 0.6% MoM for a second consecutive month as used car prices jumped another 4.4% MoM in May. This subindex, as well as medical commodities (up 0.6% MoM), was the main drivers of goods inflation in May. There were some pockets of deflation including the household furnishings and operations index which fell -0.6% MoM, the 1st decline since June 2021 and the largest monthly decline since 2009. The focus, though, remains on the services sector. Services inflation continued the same pace seen in the last two months of 0.4% MoM, and while it is an improvement from the pressures seen in the past, it is still a sustained annualized rate of 4.9%. Services inflation was led by the shelter index up 0.6% MoM and the transportation services index up 0.8% MoM. In the end, the annual rate of growth for services CPI edged down only -0.2 ppts to 6.6% YoY.
The Fed will have watched this release with bated breath as it gathers to start its two-day-long meeting leading up to a monetary policy announcement and the release of new economic projections. A CPI reading around the consensus estimates would’ve been enough to convince the Fed to hold rates steady in June, and that’s pretty much what happened. The headline index did see a slight downward surprise which reflects the positive development of a better-than-expected deceleration in food prices, but ultimately, the core CPI growth of 0.4% MoM in line with expectations is what matters. Within that index, the used cars and shelter indexes stuck out again as the big movers so a nod towards the “Supercore” index is appropriate.
That index (ex-food, energy, shelter, used cars) was up just 0.1% MoM to 4.2% YoY in May, down from 4.7% YoY in April, which is a much nicer number to look at than the core CPI number still above 5%. If you add the deflationary used cars index back in then the resulting index was just 3.4% YoY in May, down from 3.7% YoY in April. On the back of these improvements, the Fed can be assured that disinflation is happening and that a pause in June is a safe move. Powell will eye the July meeting once again as an opportunity to remain vigilant of incoming data as services inflation spurred on by wage growth is still a not where the Fed wants it to be.
Still to come…
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Morning Reading List
Other Data Releases Today
The Australian NAB Business Conditions index fell further to 8 in May, down from 15 in April. Business Confidence has turned negative, down -5 pts to -4.
Labor cost and purchase cost growth have both accelerated to 2.2% QoQ and 2.5% QoQ respectively.
Australia's Westpac Consumer Sentiment Index inched up 0.2% MoM to 79.2 in June. Unemployment expectations rose a sharp 6.6% MoM and are up 21.0% YoY.
Low economic expectations have kept the index near recessions lows for the last year.
German CPI growth in May was confirmed at -0.1% MoM and 6.1% YoY. All major subcomponent rates were confirmed as well. Core inflation fell from 5.8% YoY in April to 5.4% YoY in May.
The UK added 23k jobs in May, and the unemployment rate ticked up 0.1 ppts to 3.8% in the 3 months to April. While job vacancies fell -79,000 to 1.1 million, regular pay growth accelerated from 6.7% YoY to 7.2% YoY, indicating a still tight labor market.
Italy saw employment increase 0.4% QoQ in Q1 2023, and the employment rate increased 0.3 ppts to 60.9%. The number of unemployed grew 1.2% QoQ as well which caused the unemployment rate to tick up 0.1 ppts to 8.0%.
The ZEW Indicator of Economic Sentiment for Germany increased 2.2 pts to -8.5 in June. The Economic Situation index fell a sharp -21.7 pts to 56.5. Short-term interest rate expectations are very high, 72.3 pts, as an ECB hike is expected this week.
The NFIB Small Business Optimism Index edged up 0.4 pts to 89.4 in May.
The biggest move was a 6 pt to increase to 25% in the Plans to Make Capital Outlays index. A net 41% of owners reported raising compensation, up 1 pt, and 44% of owners reported having job openings to fill, a historically high level despite falling -1 pt.
UK Employment
Solid UK jobs report helps cement June rate hike (ING) - Faster-than-expected wage growth points to a rate hike in June and potentially August, and is a reminder that pay pressures are likely to ease only gradually. That doesn't necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off.
US
It’s Still About the Money (First Trust Portfolios) - The Federal Reserve will meet this week and announce its decisions on Wednesday. As of the close on Friday, the futures market indicated about a 30% chance of the Fed raising short-term rates by a quarter point, with about an 85% chance the Fed raises rates by a quarter point by the end of the next meeting in late July.
FOMC skip doesn't mean rates are done with rising (Saxo Bank) - US rates are in an uptrend: the US Treasury is selling large amounts of debt; CPI data might confirm stubborn inflation, and the Bank of Japan might pave the way for fewer Japanese investments abroad. Yet, leveraged investors’ net-short two-year Treasury positions might take yields in the opposite direction if a short squeeze ensues amid a dovish surprise. We believe that the latter is unlikely and that as yields increase, a window of opportunity will open for investors wanting to lock in enticing yields in risk-free Treasuries.
Calm Before the Storm (Wells Fargo) - It was a light calendar of economic data this week. The ISM Services index fell to 50.8, showing that the service sector may be losing momentum. An unexpected spike in jobless claims is a sign that cracks are forming in the labor market. Higher mortgage rates look to be hindering a housing market rebound. Mortgage applications for purchase have now declined for four straight weeks. Net exports are setting up to be substantial drag on Q2 real GDP growth.
The U.S. Open Highlights the Key Role Tourism Plays in Los Angeles Economy (Wells Fargo) - The U.S. Open, which is considered to be the national championship of golf in the United States, will return to Los Angeles this year for the first time since 1948. The 123rd edition of the tournament will be contested at the Los Angeles Country Club (LACC) in Beverly Hills from June 15-18.
Europe
The eurozone’s improving inflation outlook could leave the ECB behind the curve (ING) - Slowly but surely, the inflation outlook for the eurozone is improving. Headline inflation is normalising, but persistent core inflation is complicating things. While this remains the case, the European Central Bank will continue hiking interest rates – but for how long?
Spending Monitor - Spending growth bounced back into slightly positive territory in May (Danske Bank) - Danish card data suggests that spending rose 0.8% in May compared to May last year. This is a clear improvement from April, where nominal spending decreased y/y. Taking inflation into account spending fell 2.1% in real terms from last year. That is the smallest real spending decline since early 2022, reflecting both nominal spending growth, and a significant decline in inflation.
Housing market review Q2 2023 – Releasing the brakes (Nordea) - The various factors holding back the housing market are abating. House prices and the number of transactions are expected to increase later this year. Owning your home is still worthwhile, despite the increase in interest rates.
China
China cuts rates ahead of monthly activity data (ING) - While there has been some speculation about rate cuts, today's cut was not widely expected, and coming just ahead of the monthly activity data suggests that this set of numbers could be very weak.
Australia
NAB Monetary Policy Update – 13 June 2023 (Australia) - Following the RBA’s decision to lift rates to 4.1% at the June meeting, we upped our rate call to 4.35% by August. We are now tentatively adding an additional 25bp increase, taking the cash rate to 4.6%. Timing is less certain, and we pencil in 25bp increases for July and August.
NAB Australian Housing Market Update: June 2023 (NAB) - The national measure of dwelling values recorded a third consecutive rise last month, with the pace of growth accelerating sharply to 1.2%. After finding a floor in February, dwelling values nationally have increased 2.3% in the three months to May, following a 9.2% drop.
Africa
Sub-Saharan Africa’s role in global supply chain of critical minerals for green energy transition (S&P Global) - The energy transition is focused on building green, low-carbon and resilient economies using clean energy technologies. These are set to become the fastest-growing segment of demand for most critical minerals.
Inflation
Inflation Monitor for June 12 (BMO) - Still-high wage growth will likely keep demand resilient and underlying price pressures elevated... for now.
FX
FX Talking: Burden of proof (ING) - The central bank jury is most certainly still out on whether policymakers have done enough to tame inflation. The implications for FX markets are that the Fed may need to stay hawkish a little longer and our forecast cyclical dollar decline may get delayed. For now, however, we maintain the view that the dollar will be much lower by year-end.
Real Estate
Higher Interest Rates Continue to Strain Commercial Real Estate: Commercial Real Estate Chartbook June 2023 (Wells Fargo) - Over the past year, the Federal Reserve has tightened monetary policy aggressively in response to mounting inflation. Despite the effective federal funds rate now 500 bps higher than where it was at start of 2022, on balance, the economic data continue to come in on the strong side. The labor market, in particular, has been remarkably resilient. The nearly 340,000 net new jobs added during May continued the string of stronger-than-expected job gains and reflects a still-solid pace of hiring even as conditions moderate slightly.
Households’ Real Estate Asset Value Falls for Third Consecutive Quarter (NAHB) - The first quarter of 2023 release of the Z.1 Financial Accounts of the United States shows for a third consecutive quarter the value of households’ real estate assets contracted. The combination of economic uncertainty and declining home prices has played a role over the past year in decreasing the value of households’ real estate assets.
Tax
The Impact of Tax Differences on Intrafirm Patent Transactions (St Louis Fed) - Tax differences between countries can have a big impact on intellectual property (IP) transactions that occur within a multinational company. For many multinationals, the most important IP transactions involve patents, which are valuable exclusive rights that allow inventors to control their inventions for a certain period of time.
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