July CPI Report: Decoding the Fed's Next Move

Author

Irving Wilkinson
August 14, 2024

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Good afternoon,

I'm writing to provide you with an update on the latest Consumer Price Index (CPI) report and its potential implications for our investment strategy.

Key Highlights:

  1. July CPI Data:

    • Headline inflation: 2.9% year-over-year (down from 3.0% in June)

    • Core inflation: 3.2% year-over-year (down from 3.3% in June)

  2. Market Reaction:

    • Stock futures indicate a mixed but generally positive opening

    • Treasury yields initially rose, with the 2-year note yield settling at 3.97%

  3. Federal Reserve Expectations:

    • 100% probability of a 25 basis points rate cut in September

    • Reduced likelihood of a larger 50 basis points cut

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Analysis

The July CPI report supports the ongoing trend of disinflation, which aligns with our previous projections. This data strengthens the case for a potential Fed rate cut in September, a scenario we've been positioning for in our portfolios.

Shelter costs remain a concern, accounting for nearly 90% of the monthly increase in overall prices. However, we're seeing positive trends in other areas, such as used car prices, which have decreased significantly over the past year.

Investment Implications:

  1. Fixed Income: The potential for rate cuts may benefit our bond holdings, particularly in the intermediate-term sector.

  2. Equities: Sectors sensitive to interest rates, such as real estate and utilities, may see increased interest.

  3. Regional Considerations: Despite overall cooling, some metro areas still experience inflation above 4%, which may impact our real estate investments in those regions.

Looking Ahead:

We'll be closely monitoring the upcoming Federal Open Market Committee (FOMC) meeting in September. While a rate cut seems likely, the magnitude and timing remain uncertain. We're prepared to adjust our strategy as needed based on the Fed's decisions and communications.

As always, we remain committed to navigating these economic shifts to protect and grow your investments. If you have any questions or concerns, please don't hesitate to reach out.

Best regards,

Irving Wilkinson, Editor

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