Stock investors applaud July inflation data. Big companies like Pimco and BlackRock are not so sure.

Wednesday’s release of the consumer price index report for July contained enough downside surprises to give equity investors hope that the worst of inflation may be behind it. Still, an undercurrent of concern remained among big companies like Pimco and BlackRock Inc., the world’s largest asset manager.

Pimco economists Tiffany Wilding and Allison Boxer said the report’s details were “firmer” than implied by the headline CPI annual rate – which fell to 8.5% in July from 9.1% in June and is below economists’ expectations. and inflation derivatives traders. If food and energy prices continue to fall, June will likely prove to be the year-over-year peak in headline inflation, Wilding and Boxer wrote in a note. But the annual baseline measure, which excludes food and energy, “will likely reaccelerate in August and is not expected to peak until September.”

The so-called base reading, which excludes volatile items, is important to many in the financial markets because it is meant to represent a true underlying reading of inflation – although there is some debate over the time frame of the base gauge which is the most relevant. The Core Gauge was unchanged at 5.9% for the 12 months to July, and 0.3% on a monthly basis, from 0.7% in June.

Wilding and Boxer point out that the categories driving July weakness in the core – airfares and hotels – “tend to be more volatile, while the stickier components (Rents/Owners-Equivalent -Rent) remained firm”. In addition, the economists said, other core measures of inflation from the Cleveland Fed, New York Fed and Atlanta Fed “all accelerated” – with the depth and extent of inflationary pressures on the various elements. Meanwhile, wage inflation has also spread from low-wage, low-skilled service jobs to a range of industries, jobs and skill levels, they said.

“Today’s print did not change our core inflation forecast of 5.5% and 3.5% year-on-year, for 2022 and 2023, respectively, or our short-term outlook for the Fed,” the Pimco economists said. They still see a relatively high possibility of another 75 basis point rate hike in September.

Rex nut: Inflation has yet to peak as rents continue to rise rapidly

Bond giant Pimco, which managed $1.82 trillion in June, isn’t alone in sharing its hesitation over July’s CPI data, even as economists at BofA Securities and Jefferies have called for a spike. of inflation.

Rick Rieder, BlackRock’s chief investment officer for global fixed income, said headline inflation is “still operating at a worryingly high rate” and the persistence of still strong inflation numbers “puts policymakers in the Fed firmly on course for continued aggressive tightening.” Like economists at PIMCO, Rieder also expects rates to rise by three-quarters of a percentage point next month.

Additionally, Robert Frick, a business economist at the Navy Federal Credit Union, said “we’ll need a few more to call a peak and see a meaningful downtrend.” And Comerica Bank’s Bill Adams said the United States was at risk of “another energy price shock” over the winter in the likely event that Europe suffered a shortage of electricity. ‘energy.

Investors “have been more than keen to call a spike in prices” and “July’s softer headline is likely to perpetuate the idea that the worst cost pressures are now a thing of the past,” Lindsey Piegza and Lauren said. Henderson by Stifel Nicolaus. & Co. But “the market has been reacting (too) violently to a single data point for some time now” and Fed policymakers need several months of meaningful price cuts before they can be convinced that inflation decline permanently.

Following Wednesday’s CPI release, fed funds futures traders dropped expectations of a 75 basis point Fed rate hike in September to 39.5%, while rising the probability of a smaller hike by 50 basis points at 60.5%, according to the CME FedWatch Tool.

The three main American indices DJIA,
+1.46%

SPX,
+1.90%

COMP,
+2.53%
were higher in afternoon trading, with Dow industrials up nearly 500 points. Meanwhile, investors plunged into bonds and drove most yields lower, led by the decline in the 2-year TMUBMUSD02Y,
3.148%
and 3-year rate TMUBMUSD03Y,
3.092%
which reflect the expected policy trajectory of the Fed over the next few years. The 10-year benchmark yield TMUBMUSD10Y,
2.758%
fell to 2.77%.

“The decline in underlying inflation is good news, but remember: we’ve been here before,” said Omair Sharif, founder and chairman of Inflation Insights.

After a surge in inflation in the second quarter of 2021, core inflation moderated sharply in the third quarter and then accelerated again in the fourth quarter, he wrote in a note. Moreover, a similar situation unfolded between January and June this year, he said. “We’ve had pretenses before, so now is not the time to get complacent,” Sharif said in a note.

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