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Leland Abrams, who serves as Chief Investment Officer for the investment manager Wynkoop LLC and a portfolio manager of a fixed income fund at Catalyst, provides his analysis of the release of economic data on July 28, 2023:
Today’s economic release of inflation data continues to paint an improving picture. Headline CPI rose 0.17% in July from June, or 3.18% from a year ago. Core inflation also rose 0.2%, the same as last month, bringing the YoY change to 4.7%.
However, a closer look at core is necessary. The shelter component still showed a positive gain, which is not realistic (we’ve discussed how lagged these data are). In the real world, rents peaked last year and are coming down, which will make its way into these readings very soon, we suspect.
The San Francisco Fed released a study a few days ago discussing this very fact. They estimate that shelter services will turn negative by next year and stay there for a while, helping drive core CPI materially lower. The shelter component makes up 40% of the core CPI.
Core CPI excluding shelter was -0.06%, with a 3-month annualized equivalent at 1.13%, well below the Fed’s 2% target.
The market responded with a small rally in the yield curve, but relatively muted as traders positioned themselves positively pre-release. Fed swaps are now almost erasing the chance of a September hike and lowered the probability of a November hike to around 20%.
