Cheers to the CPI data- earnings season is next.

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The equity market rose higher with the release of better-than-expected CPI data. It came as inflation fell more than economists forecast, sending a better prospect of the economy moving into a better balance with price stability,

Both CPI and Core CPI (excluding food and energy) showed improvement reflecting the effect of monetary tightening on the economy.

A sound inflation reading

The deceleration in June’s inflation report was indicative across the board. Core CP, the main focus as it is a preferred gauge of underlying inflation, rose merely 0.2%. This is the smallest rise since August 2021. It is achievable as key categories such as airfares, alcohol, and rental cars declined while grocery costs remained neutral.

Likewise, Core CPI that excludes housing, which Uncle Powell has often highlighted, also showed improvement as price growth chilled. We also see an unchanged level for medical care and recreation services. Transportation saw a modest uptick of 0.1%, and education services dropped 0.35.

It is a testament to the positive progress made by the Fed after 10 consecutive rate hikes that sent the federal fund rates to reach 5-5.25%. All signs are encouraging across the various sectors.

A tougher fight is ahead of us.

While we are giving the Fed a well-deserved pat on their effort, bringing the inflation down from the current 35 to the central bank’s target of 2% will be an uphill task. It will take more painful measures for the economy and financial markets. Ideally, this will mean a rise in the unemployment rate to accomplish the final puzzle of a more balanced labour market.

Given such a degree of unfinished work, the Fed is set to remain on its hiking course, though at a modest pace. Already, market participants are pricing in a 92% chance for the Fed to increase the rate by another 0.25% in July FOMC.

This is unsurprising as the “sticky” sector, such as shelter cost, remains elevated and anchored at a high level. It is the larger contributor to the growth in inflation for June. More work still needs to be done to bring this cost down to a level that helps to picture the overall inflation narrative better.

What’s on the menu today?

8.30 pm: Initial Jobless Claims, PPI (MoM), Core PPI
6.45 am : Fed Waller Speaks

PPI will also be a key indicator as we need to see stable figures such that producers are not facing too high an inflationary input cost that could still feed into the economy.

It is 13 July 2023, Thursday, 8.55 am in Singapore and 8.55 pm in New York. The market continued to see strength from the rosy CPI data, and we are mindful of the elevated level and will still maintain a more cautious optimism on the path ahead.