Sightline Weekly Market Update: Inflation Data Moves Lower
Stocks rallied last week on news that the CPI (consumer price index) and PPI (producer price index) US inflation data moved lower in July. The July data was a relief after a significant surprise increase for June. While inflation remains elevated, investors took the data as a sign that inflation may have peaked and could be slowing. The July data gave market participants hope that the Federal Reserve policymakers might slow the pace of rate increases in the coming months from the anticipated 75 basis points increase to 50 basis points. Small caps outpaced large caps, with the energy sector leading while consumer staples lagged. European stocks followed North American equity markets higher as fears of aggressive rate hikes receded.
Last Tuesday, the US Bureau of Statistics released the second quarter labor productivity data showing a decrease of 4.6% annualized. Output decreased by 2.1%, and hours worked increased by 2.6%. For the same period last year, nonfarm business sector labor productivity fell by 2.5%, with a 1.5% increase in output and a 4.1% increase in hours worked. The latest reading came on the heels of the first quarter decline of 7.4% (annualized), the largest in 75 years. Unit labor costs in the nonfarm business sector also increased in the second quarter by 10.8% (annualized). The latest reading reflects a 4.6% decrease in productivity and an increase of 5.7% in hourly compensation. Unit labor costs over the last four quarters increased 9.5%, the largest four-quarter increase since the first quarter in 1982.1 This latest reading of labor unit costs indicates companies will find it challenging to protect margins if the trend of high labor costs and lower productivity persists.
On Wednesday, the US Department of Labor released the latest Consumer Price Index reading, unchanged since the June reading. Year-over-year, the CPI increased 8.5%, down from the 9.1% June reading. The decline in the gasoline index by 7.7% and smaller declines in used car prices, airfares, communication and apparel in July were offset by shelter, medical care, motor vehicle insurance, household furnishings and operations, recreation, and new vehicles indices. The core index, less food, and energy rose 0.3% in July.2
On Thursday, the US Bureau of Labor and Statistics released the latest Producer Price Index for final demand reading for July. The Index fell 0.5% in July, following a 1% advance in June and 0.8% in May. The demand for finished goods declined 1.8%, whereas the final demand for services increased 0.1%. The decline in July was attributed to the gasoline prices falling 16.7%. The final demand index less energy, food, and trade services increased slightly by 0.2, bringing the total increase for 12 months to 5.8%.3
Also, on Thursday, the jobless numbers were the highest since November 26, 2021. The number of Americans filing for benefits for the first time was 262,000, 14,000 higher than the previous week. Continuing claims for all benefit programs for the week ending July 24 increased from the last level by 9,206 to 12,055,317.4
On Friday, the University of Michigan survey of consumer sentiment reported an increase to 55.1 from the July reading of 51.1. Consumer expectation for one-year inflation fell slightly to 5% from 5.2% but rose over the next five years to 3% from 2.9%. In the report, inflation was cited as the reason for eroding the standard of living by 48% of the respondents.5
The most recent rally could assume we have seen peak inflation, and the US Fed policymakers might slow the pace of rate increases in the remaining months of the year. As previously mentioned, tight labor markets may force the Fed to push higher rates until the labor markets balance with the followed indicators. This imbalance may result in increased volatility in the coming weeks; however, if inflation continues to wane, the latest market rally may have more legs.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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