Note: this publication will be on hiatus for the next two weeks, returning for the August 5th edition.
Trend watch and what’s new this week
We’re continuing to keep a close eye on the COVID-19 trends. There has been a marked increase in new COVID-19 cases, up 14.5% in the past week. Indeed, the BA.4 and BA.5 variants are contributing to the recent rise, but the July 4th holiday likely also skewed the testing and reporting.
The Independence Day holiday is cycling through the activity-based data (slides 5 and 6), weakening most. Hotel occupancy, temp staffing, and rail traffic saw sizable declines, as did the back-to-office readings.
Yet, air passenger counts jumped 2.5% WoW and restaurant bookings edged upward. It’s possible that some of the declines are the timing of the holiday, whereby some folks may have extended or shortened their trips, pushing up the prior week figures, etc.
Gasoline spike caused another blistering headline inflation reading, but core views showing a different picture
Inflation, as measured by the Consumer Price Index (CPI), continued to heat up in June, up 9.1% from a year ago. On slide 7, we show the key components of consumer inflation.
Gasoline prices soared 11.2% MoM in June. Thus far in July, gasoline prices have declined nearly 6%, which should help with the July inflation readings. Yet, due to continued supply imbalances, we’d recommend holding off on cheering about lower gasoline prices (slide 8).
The pace of core CPI, which excludes food & energy, also rose month over month in June, but continued to soften on a year-over-year basis (slide 9). In fact, it was first year-over-year reading below 6% in six months for core CPI. A big reason is that used car prices coming back down to earth (slide 10).
Wholesale inflation readings, known as producer prices (slide 3), also remained hot. Of course, wholesale prices eventually work their way into consumer prices.
Separately, the Zillow Rent index in June rose 0.8% MoM and up 14.7% YoY, though cooler than up 17.2% in February. While prices remain significantly above pre-pandemic levels, rental growth clearly peaked during the second half of 2021 (slide 11). Rents feed into the inflation readings, though take several months to cycle through.
Consumer sentiment ticked up in July, inflation expectations falling
Consumer sentiment remains quite gloomy, driven by inflation pressures and recession concerns. Yet, the University of Michigan Consumer Sentiment Survey edged up in July after the June crash to the lowest level since the survey began in 1978 (slide 12). Meanwhile, within the survey, long-term inflation expectations slumped to their lowest level in a year. This is a key indicator for the Federal Reserve (the Fed), which is keen on reining in inflation expectations.
Consumer spending surged in June
Retail & food sales hit a fresh all-time high in June along with upward revisions to May, though it fell 0.1%. Indeed, higher prices, particularly for gasoline (up 3.6%), boosted sales. But, excluding autos and gasoline, sales also hit a new all-time high.
The crosscurrents within the economic data persists. Inflation pressures are very real, especially for those on the lower end of the income spectrum. Both consumer and wholesale inflation in July were well-above recent norms.
The silver lining is that we already know gasoline is currently a few pennies from the May month end price, having backed out essentially all of the June increase. This gives us some hope that June might be the peak in headline CPI. Given other demand softness, it probably has peaked. Still, we expect U.S. gasoline prices to remain elevated throughout the summer driving season.
Also, the hotter inflation readings may spur the Fed to increase the size of the rate hike at the upcoming meeting in the last week of July. We currently expect another 75-basis point (0.75%) rate hike but wouldn’t rule out a full point move (1.00%) in July as the Fed tries to curb rapidly rising inflation.
Ultimately, these trends continue to make for a difficult macro backdrop. For example, disrupted supply chains are much improved today compared to 2021 but are still not fully recovered. Autos are the poster child for this, and production is still well-below pre-pandemic levels (it was down again in June).
There is also abnormal spending, marked by the outsized spending on goods and continued pent-up demand for services, a stretched labor market, tightening financial conditions, and higher inflation. Meanwhile, global central banks, especially the Fed, have dramatically hiked artificially low interest rates and governments have reduced fiscal stimulus. The latter two are appropriate and couldn’t/shouldn’t continue. Still, on net, these are less supportive for economic growth.
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