Hot US June CPI turns up pressure on the Fed
NEW YORK (Reuters) - U.S. consumer prices accelerated in June as gasoline and food costs remained elevated, resulting in the largest annual increase in inflation in four decades and cementing the case for the Federal Reserve to hike interest rates by 75 basis points later this month.
The consumer price index increased 1.3% last month after advancing 1.0% in May, the Labor Department said on Wednesday. In the 12 months through June, the CPI jumped 9.1%. That was the biggest gain since November 1981 and followed an 8.6% rise in May.
STOCKS: S&P 500 futures turned sharply lower, and were down 1.6%, pointing to an ugly open on Wall Street
BONDS: U.S. 10-year yields rose to 3.0524%; Two-year yields rose to 3.1775%, deepening the 2s/10s yield curve inversion to more than 13 basis points
FOREX: The dollar index turned 0.21% higher
QUINCY KROSBY, CHIEF EQUITY STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA:
"The market had expected a higher print. The president mentioned inflation yesterday when he was speaking. Typically that's an indication the concern has deepened for the administration. But no one expected over a 9% print.... The Fed has been clear almost since the end of the end of last Fed meeting that 75 basis points is coming at the end of July... It's been well telegraphed. The market has also been suggesting that we're close to peaking or plateauing in inflation. We're starting to see prices come down in commodities, freight and shipping, and the global supply chain challenges appear to be easing at the margin, which should lead to prices coming down... More important will be the preliminary consumer sentiment report that comes out. The question now is, is 1% now on the table and up for discussion?"
ANTHONY SAGLIMBENE, GLOBAL MARKET STRATEGIST, AMERIPRISE FINANCIAL, TROY, MICHIGAN
“The market has been preparing for a hot number all week. I don’t think it’s a surprise that the number came in hot. For the week investors were building in the fact that we would get a hotter print. Now that we have it, it shows inflation has not peaked yet. The market wants to see at some point that inflation is going to peak.
“Hotter inflation equals a more aggressive Federal Reserve. Powell is going to see inflation peak, which it might be in July. It means the Fed is going to continue to be aggressive, and right now the Fed is not your friend, at least from an investor stand point and until that changes, it’s going to be hard for stocks to gain traction.”
EUGENIO ALEMAN, CHIEF ECONOMIST, RAYMOND JAMES, ST. PETERSBURG, FLORIDA
"Core inflation was expected to remain below 9% so it wasn't a good number. In some ways it was expected from the point of view that gasoline prices were very very high at the beginning of the month. By mid-June that changed considerably but it still seems to have affected prices considerably more than what everybody was expecting. The good news is that July's inflation is not going to be that bad because oil and gasoline prices have come down." "I believe this is the peak. Even if it is the peak, the risks still remain because the war between Russia and Ukraine still going on and any surprise could impact petroleum market and that will continue to be a risk going forward. The risk for continued higher inflation remains there just because of the uncertainties of the war." "It reinforces our view that the Fed is going to raise rate by 0.75% in the late July meeting. The Fed has to show they are on top of this and they cannot backtrack."
MICHAEL PEARCE, SENIOR US ECONOMIST, CAPITAL ECONOMICS, NEW YORK
"The stronger-than-expected 1.3% rise in consumer prices in June, pushing headline inflation to 9.1%, from 8.6%, nails on another 75 bp hike at the July meeting but, with commodity prices falling sharply since then and wage growth moderating in recent months, the outlook for inflation does not look as bleak as it did a month ago. Accordingly, speculation about a 100 bp hike this month looks to be misplaced."
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC
"This morning's number is staggeringly high. It's higher than expected and shows that inflation is going quickly in the wrong direction. It really pushes the Fed even further into the corner they've been operating in. They need to raise rates quickly and they need to raise rates by large amounts."
"An increase of 75 basis points is the most likely for this month ... the big change based on this data is that we're likely to see more 75 basis point increases, not just this month but, in subsequent months."
"The impact of tighter Fed policy is detrimental to stock prices market. The inflation threat is real to the bond market."
"The picture before today was that the Fed has to fight inflation by raising interest rates. We still don't know what's going to happen but its most likely we're going to have a recession because the Fed is going to have to act aggressively. A soft landing is relatively unlikely because that's so difficult to achieve. Unfortunately we were looking for good news and this is not good news."
RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“If we did get a low print we probably could get a little rally in equities but I didn’t think that would happen. Even if you look at the core but I think it is important, really, to focus more on the actual headline number because when you talk to consumers the two things that are affecting them the most are the prices of food and energy so it’s hard to ignore that. But gasoline prices were rising throughout the first two-thirds of the month of June and they didn’t really start coming down until after that so it almost seemed certain that we would end up with a high print. But if we were to get a lower print then it would’ve been net bullish for equities and the reason I say that is that it might imply the Fed will tighten in smaller increments, in other words, bring that three-quarter hike at the end of the month down to a half or that they might stop sooner. Neither of those things happened.”
“The probability of that rate hike was 100%, it hasn’t been that high since the last hike, it was like 85% just a week ago, so that number was implying we were going to get a hot print, which I am not surprised by. I do think this could be the peak, if you look across the commodity space, most commodities are on the way down and that includes energy, but that didn’t really start until the latter quarter of June so this could be the peak but you can’t really call it just yet, it’s too soon.”
DAVE GRECSEK, MANAGING DIRECTOR IN INVESTMENT STRATEGY AND RESEARCH, ASPIRIANT, NEW YORK
"The Fed sees broad commodity prices sharply lower. It sees wages higher but not like a wage-price spiral higher. And then the dollar is very strong. So there's a bit of a cooling expectation in terms of where future inflation might head and they also realize that the hikes that they've already done are having effect. They're going to hesitate to raise rates more than they need to at this point, even though we did get a higher than expected inflation number right now."
"If we see a few more upside misses to the extent that we've seen today then that could matter for the Fed, but the markets are going to take this in stride today."
"The Fed has been pretty clear and transparent in terms of conveying the expectation that they're going to continue to move short-term rates rapidly higher. So this does not really change that too much. If we see another few months of greater-than-expected inflation at the levels we're seeing today than that might change the Fed's course."
"Higher than expected inflation is just going to mean that the Fed is going to have to continue to increase policy rates which for both equities and bonds is going to continue to weigh on returns."
STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST, MIZUHO SECURITIES USA LLC, NEW YORK
“It is hot and suggests there will be further yield curve inversion. It suggests the front end of the curve is going to move up some more, as people price in 75 basis points, and maybe moving that end-of-year estimate from 3.5% to 4%, as that lone dot was in the June summary of economic projections.
“This is a problem with all these data in that this becomes sticky for a while and when it finally changes it will change fairly quickly. But waiting for it to change is always the problem and everyone anticipates the next month is the peak, when actually it could be further into the equation than you thought. That’s what this number shows you.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“The numbers were worse than expected, but the fact that the core (CPI) shows some deceleration year-over-year shows a bit of a hint that this the last hurrah in terms of inflation moving higher.”
“While the numbers are ugly and certainly guarantee a 75 basis points (interest) rate hike by the Fed in July, the hints that inflation might be beginning to decelerate are there.”
“It might even tip the hands of the Fed to raise (interest rates) by 75 basis points in September as well.”
“Most of the gains are coming in energy. The good news is that energy prices have begun to head lower and that should show up in the next reading.”
“The market doesn’t like it, but this is the first reaction. I suspect once the numbers are fully digested, we’ll see a repeat of what we’ve seen for the last couple of days.”
(Compiled by the Finance and Markets Breaking News team)