Market Commentary 8/16/22

The July Consumer Price Index report came out last week, and the headlines were positive. The All Items Less Food & Energy category rose +0.3% month-over-month verses the +0.5% consensus estimate. This is down from June’s +0.7% month-over-month reading. Additionally, the annualized +8.5% year-over-year inflation pace also came in slightly under expectation and was also down from June’s +9.1% year-over-year reading.

The market’s initial reaction was overwhelmingly positive as the inflation slowdown reignited hopes for a Fed tightening slowdown. Some experts believe a case can be made that inflation is easing and the Fed will slow its tightening pace. However, it is also quite possible the underlying data indicates the market’s reaction is wishful thinking. For example, the cooling inflation pressures were driven by Apparel, Appliances, Used Vehicles, Hotels, Car & Truck Rentals, and Airfares. Conversely, furniture, Housekeeping Supplies, New Vehicles, Beverages, Rent, Vehicle Repairs & Insurance, and Food all continued their steady climb upwards. Additionally, the median rent in the United States just surpassed $2,000 for the first time ever.

The categories the Fed is most concerned about are still increasing, and there is not clear and convincing evidence inflation is receding. It’s possible the Fed’s tightening pace may slow, but that is different from cutting rates. Risk assets remain vulnerable to a selloff, market volatility should be expected to remain high. We believe the Fed is likely to continue their aggressive rate hikes for at least another meeting to combat rising prices.