August CPI came in "hot" as Core CPI came in at +0.30% versus Wall Street expectations for +0.20% and above our +0.16% to +0.18% estimate. The details, however, are better than the surface-level readings.
* The details for August CPI are actually better. The +0.10% MoM is entirely due to two categories:
-- Motor Vehicle insurance surged +2.4% (29% annualized) adding +0.08% to Core
-- Airline fares exploded +4.89% (59% annualized) adding +0.03% to Core
-- combined, these two added +0.11% to Core, or the entire upside surprise
* Vehicle insurance is simply catching up to the surge in auto prices over past few years (replacement cost, etc.) and one wonders, do further hikes slow this? Not really.
* Airline fares exploding higher is not congruent with the significant guidance cuts by American Airlines (AAL) and Spirit Airlines (SAVE) . To me, this rise in airlines is somewhat one-time.
These two items also drove the "super core" (aka Core Services ex-shelter) to +0.53% MoM.
-- Motor Vehicle insurance +0.28%
-- Public transportation +0.12%
-- Total +0.40% of the +0.53%
* Does the Fed want to hike further to contain these two items?
* The Fed fund futures pushed hikes into November.
-- September odds now 2.3% -4.50%
-- November odds now 39.3% +4.10%
So the hikes are pushed into November.
* That speaks to it all. There is not enough here to drive a September hike.
* In fact, look at other key market metrics:
-- US 10-yr yields 4.278% ~no change
-- VIX 13.64 -0.59 down
-- Oil flat $89
* So, there is not a whole lot of change in reaction to the CPI report.
BOTTOM LINE: Stocks are sort of stuck now given upcoming tape bombs and FOMC.
The message from the CPI report is that overall inflation is tracking lower but these one-time items highlight that progress is not linear. And there could be some difficulties with seasonal adjustments. Equities are potentially stuck until the FOMC rate decision meeting next week (9/20):
* August PPI is released Thursday at 8:30am ET and this is probably not a positive surprise.
* Thursday evening, 9/14 at near midnight, the UAW is expected to go on strike.
* Investors will probably see how markets react Friday before moving forward.
* Friday is U Mich consumer confidence 1-yr inflation mid-month.
* Next week, Manheim is Tuesday 9/19 <- should be good.
* FOMC rate decision Wed 9/20.
So, there is plenty of fodder ahead for bulls and bears. Equities are flat to slightly up. This is consistent with what we have seen in prior CPI "misses."
Source: BLS
