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We’ve gotten some revealing data this week and big swings in markets.

CPI came in soft yesterday, indicating slowing inflation, which lead to a repricing of small-cap stocks higher and large-cap stocks lower. The Russell 2000 (includes long tail of stocks) soared 3% yesterday while the Nasdaq (big tech heavy) fell 2%.

This was mostly a function of a direct rotation from large to small, as small-caps are disproportionally suppressed by high inflation and high interest rates because they have less robust balance sheets.

We then got a slightly hot headline PPI report this morning, indicating sticky inflation, but the market mostly shrugged at the datapoint so far and all indexes have marched higher.

The odds of an interest rate cut in September have surged from 77% to 96% according to Fed Watch pricing.

Crypto has bounced around with low correlation to stocks, with bitcoin sitting roughly flat over the last 24 hours and for the week at $58k, after nuking below support last week.

Ether has outperformed bitcoin as traders position ahead of its ETF launch later this month.

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US CPI 3.0% Y/Y, -0.1% M/M, Beating Expectations

WHAT HAPPENED

• Consumer Price Index (CPI): Fell 0.1% MoM in June, pulling the YoY rate to 3%, the lowest in over three years.

• Core CPI: Increased 0.1% MoM and 3.3% YoY, the smallest annual increase since April 2021.

• Energy Prices: Gasoline prices dropped 3.8%, significantly impacting overall inflation.

• Food and Shelter Costs: Both increased by 0.2% MoM.

• Used Vehicle Prices: Decreased 1.5% MoM and 10.1% YoY.

• Labor Market: Weekly jobless claims fell to 222,000, the lowest since June 1.

WHY IT MATTERS

• Fed Rate Cuts: The decline in inflation strengthens the case for potential rate cuts, possibly as early as September.

• Economic Indicators: The soft inflation report boosts stock market futures and lowers Treasury yields, reflecting market optimism.

• Earnings Impact: Real average hourly earnings for workers increased 0.4% MoM, indicating improved purchasing power despite modest YoY gains.

• Policy Implications: Traders are increasingly betting on multiple rate cuts this year, with rising probabilities for a September cut.

KEY TAKEAWAYS

• Inflation Trends: Headline and core inflation rates indicate a cooling trend, providing the Fed with "ammunition" to consider rate cuts.

• Market Reactions: Positive stock market futures and falling Treasury yields signal market confidence in a potential Fed policy shift.

• Economic Sentiment: The reduction in inflation and jobless claims supports a positive economic outlook, reducing recession fears.

Data Source: Bureau of Labor Statistics, CME Group’s FedWatch tracker

CONCLUSION

June's CPI report reveals a notable decline in inflation, reinforcing the possibility of Fed rate cuts later this year. This shift could provide relief to markets and consumers alike, as economic indicators point towards a cooling inflation environment. The upcoming months will be critical in determining the Fed's response and the broader economic trajectory.

CNBC

US PPI Seen At 2.6% in Mixed Signal Report

WHAT HAPPENED

• Stocks edged up after a tech selloff, buoyed by mixed inflation data and the start of earnings season.

• Producer Price Index (PPI) rose slightly more than expected, but key components feeding into the Fed's preferred measure, the Personal Consumption Expenditures (PCE) index, were stable.

• PCE Inflation Details: Factors affecting PCE inflation were soft, largely due to medical services.

WHY IT MATTERS

• PPI Insights: The headline PPI increase suggests rising producer costs, but crucial components for the PCE index remained stable. This indicates inflation at the consumer level may not be as severe, bolstering hopes for a rate cut in September.

  • Paul Ashworth (Capital Economics): "PPI was actually a lot better than it looks."

  • Citi’s Core PCE Prediction: Now expected to rise by 0.17% month-over-month in June, down 4 basis points from post-CPI estimates.

• Inflation Insight: The higher PPI indicates rising producer costs, but the soft PCE components suggest consumer-level inflation remains controlled, easing immediate concerns over aggressive rate hikes.

• Fed Policy Implications: Stable PCE data strengthens the case for a potential rate cut in September, providing relief to markets.

Yahoo Finance

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.ll