Waiting to exhale Waiting to exhale http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\mmdt-weekly-Small.jpg August 12 2022 August 15 2022

Waiting to exhale

Weekly Bond Commentary

Published August 15 2022

That was the market sentiment ahead of the anticipated July consumer price index report. A bad result would have increased the likelihood the Federal Reserve would react by raising its federal funds rate more aggressively. The actual result was less bad than feared, as July’s number showed no change, after rising 1.3% in June. The yearly CPI increase slowed from 9.1% to 8.5%, slightly below economist expectations. Inflation was driven lower by energy prices, which fell 7.6%, airline fares, down 7.8%, lodging away from home, down 2.7%, and used car prices, down 0.4%. However, food prices kept rising, up 1.1%, shelter prices rose 0.5%, rent rose 0.6%, and new car prices rose 0.6%. Over the last year, food costs have risen 10.9%, energy 32.9%, and all other items up 5.9%. So, while CPI was better than expected, it is still far too high for the Fed’s comfort.

Following last month’s blockbuster gain in employment, markets had begun pricing in a series of larger fed funds hikes, such that the year-end 2022 level would reach 3.6%. But after the tamer CPI report, that was scaled back, by at least one full 0.25% hike, before settling in around 3.50%.

Weekly jobless claims continued to rise, but so did the University of Michigan consumer sentiment survey. Consumers expect the future to be good, but their view of current conditions fell. Consumers reported hearing unusually negative news about the economy, which in turn shapes their own views. High prices and strong labor markets are seen as negatives in the current environment, as businesses may be challenged to hire. So, the tug of war between good news and bad news plays out in more volatile market price action.

Tags Markets/Economy . Fixed Income .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

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