Still reeling from last week’s whirlwind, bond traders’ focus will turn to US inflation data and the August refunding series in the days ahead.
CPI figures out of the US should show both core and headline prices rose 0.2% in July from June, a tolerable pace that’d keep the disinflation narrative alive.
Recall that June’s CPI report was pivotal. I should clarify: It’s possible the last CPI report was pivotal. Definitively identifying turning points typically entails availing oneself of hindsight — and its legendary benefits. God knows the Fed was left in the lurch by several false dawns since inflation accelerated in the spring of 2021. It’s possible this is another one. And yet, the June report did feel different.
It’s temping to say the July figures, due Thursday, will be decisive, but that’s a bold claim. One month’s data is just one month’s data. Two months would be a streak, but not exactly a proper trend. As Michelle Bowman put it over the weekend, during remarks for an event in Colorado, “The recent lower inflation reading was positive, but I will be looking for consistent evidence.”
She didn’t just mean inflation. Bowman also wants to see evidence of slower consumer spending and looser labor markets. July’s relatively soft NFP headline notwithstanding, such evidence is still lacking, despite 525bps of Fed hikes in a very compressed time frame. Suffice to say September’s FOMC meeting, and certainly November’s gathering, are live until further notice.
The focus now is squarely on the core readings. The headline, all-items print will be left to do whatever it’s inclined to do for the next few months as base effects roll out, and traders look for evidence that key underlying aggregates, including and especially America’s own “supercore” measure (services ex-housing), are moving in the right direction. Economists expect the YoY core print to remain mostly unchanged from June’s 4.8% pace.
The market reaction to the following day’s PPI data will be conditioned on the CPI report. If the latter’s friendly, another cool read on producer prices would be icing on the cake.
If the CPI update isn’t constructive for the disinflation narrative, a benign read on factory gate prices wouldn’t much matter. A hot read on PPI following an above-consensus read on core consumer price growth would be insult to injury. You’re reminded that the last PPI report was of the “icing on the cake” variety.
Wholesale prices rose just 0.1% in June from May, and the YoY pace flatlined. Consensus expects to hear that both headline PPI and core rose 0.2% in July from June.
In light of last week’s bear steepening episode, and the drama that catalyzed it+, the auctions will be eyed very closely. Tuesday is 3s, 10s are on Wednesday and the long bond sale is Thursday. Long-end yields rose sharply as the Fitch downgrade conspired with Treasury’s refunding announcement to spook markets. Bill Ackman didn’t help.
It’s worth asking how much of last week’s price action (which saw 30-year yields up almost 30bps on the week before Friday’s NFP-inspired rally) was a concession, versus the “forced-selling” narrative which was a bit hard to reconcile with investment mandates that were mostly changed years ago (i.e., following the S&P downgrade) in anticipation of future ratings actions.
“We’re eager to see the results, with an eye to come out of the auction process with a long bias,” BMO’s Ian Lyngen and Ben Jeffery remarked. “We anticipate the auction[s] will go smoothly and don’t expect there will be anything beyond a typical at-auction concession in the event that the pre-supply accommodation downtrade proves insufficient to underwrite the supply,” they added, noting that there’s “no question that the 10- and 30-year auctions offer a litmus test for dip-buying in the wake of the Fitch downgrade; even if we’re content to overweight the relevance of the Treasury Department’s guidance over that of the rating agency.”
Panning quickly (and somewhat abruptly) out to the global context, Chinese inflation data is due this week too. It’s possible consumer price growth will slip into deflation.
On the PPI side, China is deep in the deflationary abyss. If CPI goes negative, it’d be the first time since early 2021.
Trade figures for July are due out of Beijing as well. In all likelihood, this week’s updates from the world’s second-largest economy will underscore concerns about demand, both domestic and global.
Also on deck in the US: Consumer credit (Monday), NFIB (Tuesday) and the preliminary read on University of Michigan sentiment for August (Friday). Fed speakers include Bostic, Bowman and Harker.
