Friday, July 12, 2024

CPI, rate cuts, gold, and the market reaction: strange but not really

“It does not do to leave a live dragon out of your calculations, if you live near him.” ― J.R.R. Tolkien, The Hobbit  ||

Hi all, and happy Friday! Sending early today as I have a schedule squeeze.

Below, I discuss – of course – the CPI print, rate expectations, gold and how the strange BTC market reaction wasn’t that strange after all. There’s a lot of charts, so buckle up.

I hope you find Crypto is Macro Now useful or informative or even maybe just fun for the music links – if so, would you mind sharing it with your friends and colleagues? ❤

IN THIS NEWSLETTER:

• CPI: good news

• Interest rate cuts are now a lock

• The market reaction: strange, but not really

• Gold and central banks

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WHAT I’M WATCHING:

CPI: good news

That was a good CPI print.

The main US headline inflation index for June came in notably lower than expected – on a month-on-month basis, it dropped by 0.1%, whereas consensus forecasts had it increasing by the same amount. This is a further improvement on May’s read, in which the index was flat.

On a year-on-year basis, the headline index increased by 3.0%, vs 3.1% expected and 3.3% in May. That is a resounding deceleration.

The core CPI index, which strips out more volatile food and energy components, also came in lower than the consensus forecast of 0.2% (which would be the same as May’s increase) – in June, it increased by only 0.1%. Year-on-year, core CPI climbed 3.3% vs expectations of 3.4% (same as in May), the lowest increase over three years.

(chart via Bloomberg)

The difference between the two indices, and the welcome drop in the headline figure, can be largely attributed to lower energy prices, while the cost of shelter, food and services climbed.

(chart via Bloomberg)

One measure Fed Chair Jerome Powell focuses on is “supercore” CPI, which strips out food, energy and shelter as elements less sensitive to wages. This delivered the largest month-on-month drop since August 2021.

(chart via @KevRGordon)

With this, the Fed can say “confidence” is growing that inflation is being brought under control.

Interest rate cuts are now a lock

According to Bloomberg, traders are now pricing in a 90% probability of a cut in September, with some hopeful folks assigning an 8.5% probability of that being brought forward to July.

(chart via Bloomberg)