Weekly Bond Commentary
The much-anticipated June Consumer Price Report (CPI) was released last week, and it showed inflation falling more than had been expected. Headline CPI fell from an annual rate of 4.0% to 3.0%, while the core measure excluding volatile food and energy costs declined from 5.3% to 4.8%. Leading the charge lower were used-car prices, hotel prices and airfares, offset by higher costs of renting and home ownership and apparel. For those keeping score, core goods actually decreased 0.5% month over month; core services rose 0.25%; food costs rose 0.11%; and energy costs rose 0.60%, led by higher gasoline prices. The catch in this good report is that sharp drop in airline fares, hotel costs and used car prices likely will not repeat, and the annual report will roll off a 0% change from July 2022. Unless overall prices are unchanged, or fall, in July, its CPI report likely will show higher annualized increases.
Weekly jobless claims unexpectedly edged lower, falling from 249,000 to 237,000, reinforcing the strength of the labor markets and pushing out fears of a layoff-induced slowdown. As if like clockwork, the University of Michigan Consumer Sentiment index was released the next day, showing its biggest jump in two years. Strong labor markets and the easing lower of inflation were the key contributors. Consumer inflation expectations did, however, move a little higher, in the near and long term (over the next 5-10 years). This rise probably helps push the Federal Reserve toward a rate hike at its July 26 meeting. It needs to see inflation sustainably on a lower path before easing up. Slowing job growth will help at the margin, due to less wage pressure and subsequent goods and service demand. If the Fed hikes once or twice this year, it may then hold rates at that high level to give consumers and the economy a chance to absorb more stable prices and drive out expectations for higher prices.