The Disinflation Issue
The big news this week was the lower-than-expected CPI and PPI figures for July. While expectations for a September 50bp (0.5%) rate cut by the Fed changes on a daily basis, DKI agrees with current consensus that we’ll see a 25bp cut next month. We believe that’s premature and unwise, but still think that’s what’s coming. The best solution would be to reduce government spending, but no one in Washington DC is planning to do that, so prepare for more future inflation. Home Depot (NYSE: HD) and Walmart (NYSE: WMT) report good quarters, but are cautious in their guidance for later this year. Intel (NASDAQ: INTC) has a huge reliability problem with recent chips. DKI spoke with experts who disagree about the viability of the company’s x86 architecture. Some say it’s hit its end-point. Others think next year’s chips will be fantastic.
This week, we’ll address the following topics:
The CPI breaks 3% leading people to believe rate cuts are coming “sooner rather than later”.
June PPI came in high, but the July PPI was lighter than expected. Your conclusion: rate cuts coming “sooner rather than later”.
Home Depot has a good quarter, but gives disappointing guidance. Are higher interest rates hurting the home renovation market?
Intel has a huge problem. Its last two generations of CPUs are failing at a huge rate. Is this the end, or will next year’s Panther Lake save the company?
Walmart has an excellent quarter, but despite strong retail sales as reported by the Commerce Department, they express caution regarding the end of the year.
Ready for another week of obsessing about the fed funds rate? Let’s dive in:
CPI Softens, Rate Cuts “Sooner Rather than Later”:
Last Wednesday, we got the July Consumer Price Index (CPI) report which showed an overall increase of 2.9% for the last year and 0.2% for the month. That’s below last month’s 3.0% and expectations of 3.0%. The 0.2% monthly increase was above last month’s -0.1%. The Core CPI, which excludes food and energy was up 3.2% vs last year and up 0.2% from last month. Both of those were consistent with expectations. The annual number is still well above the Fed’s 2.0% target although there has been a clear trend in recent months toward disinflation. (Disinflation is a reduction in the rate of inflation.)
A clear and encouraging trend for the “doves” who want lower interest rates.
DKI Takeaway: In last week’s 5 Things, we noted a recent tick-up in the Manheim Used Car Index where prices rose from the prior month. I don’t think one month is a trend, but we also just saw an increase in goods inflation in last week’s PPI report. The Fed has struggled to reduce services inflation. If goods prices start to increase, they have a huge problem. On the other hand, the difficult to analyze employment market appears to be cooling, which is a result the Fed has actively been pursuing. The real issue right now is that everyone is looking for the Federal Reserve to “save” us from both inflation and a recession, but it’s Congressional spending that’s causing the problem. The market had set expectations for a September rate cut at 100% and many are expecting a 50bp cut next month. Based on ...
