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Markets Sink on False CPI Rumor - Real Numbers Out Wednesday

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Market indexes closed off the lows for this day’s session, but a curious thing happened on the way to the closing bell: a false report “leaked” tomorrow morning’s Consumer Price Index (CPI) — higher than last month’s +8.6% year-over-year headline, but let’s not honor the fake data by mentioning it here. The Dow skidded into the red for the first time since the afternoon on this event, falling 350 points in less than an hour.

The same trajectory befell the Nasdaq, S&P 500 and Russell 2000, as well. The good news is the sharp bounce-back in the last 20 minutes of the session. Nevertheless, the Dow closed -192 points, -0.62%, the S&P was -0.92%, the Nasdaq -0.95% and the Russell -0.22%. All four indices are still up over the one-month period, from +0.8% to +4.2%.

This afternoon’s little prank emphasizes the importance of these CPI numbers, which drop 8:30am ET Wednesday. Expected is a year-over-year headline of +8.8%, the highest of the year so far, +1.1% month over month — the second-highest tally behind March’s +1.2%, which was the steepest monthly rise in 17 years. CPI data has become synonymous this year with overall inflation.

One thing we do expect is for the “core” CPI — stripping out volatile food and energy costs — to drop below +6.0% for the first time in 2022. That’s still well higher than the Fed’s optimum +2% inflation, but at least we’d be headed in the right direction. Since +6.5% core CPI logged in March, we’ve come down in the months since. That said, the +6.0% we saw last month was higher than analysts had predicted.

In last month’s CPI report, Energy prices — led by high gasoline costs that pushed toward $5 per gallon on average — generated more than 3x what food costs came in, clearly illustrating where the inflation pain is located. However, as fuel prices affect Transportation and the costs of goods being transported, higher gas prices for longer have a way of seeping into other elements of the economy.

In the latest Fed minutes from the June monetary policy meeting, voting members’ biggest fear seemed to be “entrenched” inflation, which becomes harder to wash out with lower core prices. That said, it makes tomorrow’s core headline arguably even more important than in past months: should it trickle to +5.7% as expected, that would be a good sign. Stubbornly above +6% yet again — especially with a lower-than-expected headline — and we may be seeing deeper-set inflation in the economy.

Regardless, the market appears to still be locking in a 75 basis-point (bps) interest-rate hike from the Fed at the end of this month, with no meeting scheduled for August. There are lots of moving pieces flying around at present — which will be exacerbated with Q2 earnings reports beginning to surge — but when they settle, we’ll all know at least a little better where we’re situated going forward.

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