
CPI
Consumer prices rose .1% m/o/m at both the headline and core levels in July. That was one tenth less than expected for each. Versus last year, prices were up by 1.7% for both and that was up from 1.6% for the headline and unchanged at the core. Services ex energy was up by .2% for a 3rd straight month and up by 2.4% y/o/y but this trended 3%+ for a few years straight mostly due to rents and medical care. Rent of Primary Residence was up by .2% m/o/m which is the first time it wasn’t up .3%+ since December 2014. On a y/o/y basis, they are still up by 3.8% but in some major markets, excess supply is leading to a slowdown in rent growth. In mid tier markets, rent growth still remains pretty persistent but large supply is coming in all different places. I still expect the demand side to remain pretty healthy though as an offset. The fake rent number titled Owners’ Equivalent Rent was up by .3% m/o/m and 3.2% y/o/y. As this makes up 25% of CPI, if the Labor Department used actual rents instead of this faux number, CPI would be higher than stated. Medical care costs (measuring what consumers actually spend as opposed to the PCE measure which includes medicare and Medicaid reimbursement rates), rose .4% m/o/m and are up by 2.6% y/o/y. Expectedly, new and used car prices fell, each by .5% m/o/m. For used cars, prices are now down 4.1% y/o/y with obvious implications for new car sales and leases. Overall on the goods side, prices fell .1% m/o/m and .6% y/o/y.
At the headline level, energy prices were basically flat m/o/m but remain up 3.4% y/o/y. If you haven’t noticed, the AAA average gasoline price at the pump is up 11% y/o/y. Food prices were up by .2% m/o/m and 1.1% y/o/y which is actually the most since November 2015 coincident with the recent rise in the CRB food index. As for wireless phone services that recently has caught the attention of Fed members who don’t like cheaper cell phone service because it messes up their plans for 2% inflation, they fell .3% m/o/m and are down 13.3% y/o/y.
Bottom line, we have the same story of goods deflation and services inflation. With the latter, the moderation in medical care and no more further acceleration in rents have been the main reasons for its slowdown. I already hear people screaming that the Fed is done hiking rates after today’s number but if they listen to what the Fed has been saying, it’s the labor market pressures that are building that is now their focus. I’ll repeat what I said yesterday on this: “I believe that if equity markets handle QT relatively smoothly after its beginning next month, the Fed will hike rates again in December. If we have a market hissy fit instead, they will not. Thus, we will either rally ourselves right into another increase in interest rates or sell itself off away from one. Pick your poison I think.”
After the number the 2 yr yield is down by 1 bp to 1.31-.32% and the 10 yr yield is down by the same amount as well to 2.19%. The US dollar immediately sold off and gold is $5 from $1300, a level last seen two months again. Again, don’t buy gold on North Korea or geopolitical worries. Only buy it if you believe in a weaker dollar and a loss of credibility and faith in central bank omnipotence is soon to come. Rate hike odds for December are down to about 30-35% if one uses the effective fed funds rate as a guide rather than the midpoint of 1.125% of the current rate.
GLD 1 Year