–July CPI Core +0.3%; Y/Y +2.2%
By Denny Gulino
WASHINGTON (MaceNews) – Tuesday’s CPI pop, an excursion a tenth higher than the inflation comfort level, had no sooner depressed stock futures than the White House signaled a major softening of the impending tariff attack on China, igniting an explosion of share prices and halting the decline of Treasury yields.
As the brief inflation scare was swept away, so was the notion that market and data fundamentals have anything to do with market performance in a world fixated on the future of China trade. Traders absorbed the fact that the Christmas season imports of toys, appliances, cellphones and a host of other products had been rescued and instantly the Dow industrials jumped hundreds of points and Treasury yields halted their progression toward a broader curve inversion.
The magic words from the U.S. trade representative’s office were: “It was determined that the tariff should be delayed to December 15 for certain articles. Products in this group include, for example, cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing.”
The White House had been threatening a blanket 10% tariff on $300 billion worth of goods to take effect in 18 days, a threat that eroded equities gains in the past week. Instead Apple (AAPL) shares jumped around 4% in an avalanche of gains for the entire spectrum of China-related shares.
Within the monthly consumer inflation report, it was quickly evident that had gasoline not gone up 2.5%, the overall price index would not have reached 0.3%, a tenth higher than what inflation hawks like to see. It was also clear the gasoline spike was transitory, already outdated by August declines and in a context of every energy product except electricity being down for the past year. The food category was unchanged for the month.
The core rate, minus food and energy, was also up 0.3%, a more worrisome measure, largely on the strength of housing-related rents and other costs. Those move slowly and are so heavily weighted that they dominate the CPI, guarding against any disinflationary tendencies.
Until the USTR’s contribution to market cheer, the credit markets were fulfilling threats of lowering yields enough to add another layer of inversion to the yield curve, with the positive 2-year/10-year spread within just three basis points of flatness. Safe-haven trades, turmoil in Hong Kong, the Peronist victory in Argentina and the specter of a growing black hole of overseas negative yields have been reinforcing the fears of many investors that something very bad is slowly enveloping the world of finance.
Yet the very abruptness of the markets’ moves Tuesday was itself an unsettling reminder that every assumption is subject to sudden change, a reason to be hesitant about long-term planning, capital investment, commitments of any kind.
Upon close examination the July CPI report was comforting both for those who fear inflation and disinflation. There were widespread increases aside from gasoline and shelter, with new car prices the exception. Yet again there were no extreme signals that consumer prices are threatening any disequilibrium in either direction.
Last Friday’s report from the Bureau of Labor Statistics on business inflation was much the same, a 0.2% increase for July that flipped the usual goods-services dynamic. Goods prices were up 0.4% and services prices dropped a tenth. Goods prices have gone negative – sometimes steeply negative – half the months of the past year while services prices have been only slightly negative two months.