2023-08-10 11:45:09 ET
Summary
- July 2023 Consumer Price Inflation increased by 0.2%, below expectations.
- Energy prices rose slightly, but are down significantly in the last 12 months.
- Investors should expect another rate hike and should consider energy firms for potential profitability.
- Timing of rate hike discussed.
At the open, the S&P 500 ( SPY ) and Nasdaq ( QQQ ) reacted favorably to the softer-than-expected inflation figures . Stock traders welcomed the stock volatility from the U.S. CPI report for July 2023 . Investors prefer to filter out the economic noise and stock price movements. Instead, the latter group will question the headline 0.2% increase, looking for trends from the consumer price index data.
July 2023 Consumer Price Inflation Gained 0.2%
CPI for all urban consumers gained 0.2% Y/Y and is the same as the June increase. The annual core CPI increased by 4.7%, below the 4.8% expectations. The core CPI excludes food and energy prices. Skeptical readers would argue that people need to eat and consume energy. However, the Federal Reserve strips them out to exclude the two volatile data points.
Bullish stock investors would bet that the Fed would pause or even cut interest rates based on the 0.2% rise. However, shelter accounted for over 90% of the CPI increase. The central bank will recognize that when Canada paused rate hikes, it caused a housing upturn.
Stock investors should therefore expect higher (interest rates) for longer. Income investors need not rush selling the iShares 0-3 Month Treasury Bond ETF ( SGOV ). The ETF re-extended its waiver for a lower expense ratio of just 0.07% until June 2024. Its average yield to maturity is 5.36% .
Inflation Increases
The report highlighted the contribution of motor vehicle insurance to the CPI. In addition, the food index increased by just 0.2%, the index for food at home gained 0.3%, and food away from home rose by 0.2%. The energy index rose by an insignificant 0.1%. The monthly increases contrast greatly with the 12-month comparisons. Energy, gas, and fuel oil increased last month but are down in the double-digit percentage in the last 12 months.
July 2023 | Unadjusted 12 months ended July 2023 | |
Fuel oil | 3 | -26.5 |
Utility (piped) gas service | 2 | -13.7 |
Medical care commodities | 0.5 | 4.1 |
Services less energy services | 0.4 | 6.1 |
Shelter | 0.4 | 7.7 |
Food at home | 0.3 | 3.6 |
Energy commodities | 0.3 | -20.3 |
Transportation services | 0.3 | 9 |
All items | 0.2 | 3.2 |
Food | 0.2 | 4.9 |
Food away from home | 0.2 | 7.1 |
Gasoline (all types) | 0.2 | -19.9 |
All items less food and energy | 0.2 | 4.7 |
Energy | 0.1 | -12.5 |
Apparel | 0 | 3.2 |
In the chart below, energy prices fell to offset the increase in all items and food. Higher energy prices will lift the “all items CPI.”
Higher energy prices would stall the downtrend in the 12-month percentage change for all items. The chart below suggests that a recession, not a soft landing, is the catalyst that pushes the price decline to 0.0:
That idea contrasts with the Fed removing warnings of a recession ahead.
The small energy price increase could become a bigger increase in future CPI reports. Crude prices ( CL1:COM ) are on a strong uptrend that began starting in July 2023:
Investors should consider strong energy firms like Exxon Mobil ( XOM ), ConocoPhillips ( COP ), Marathon Oil ( MRO ), and Chevron ( CVX ). They currently have weak Seeking Alpha valuation and growth scores. However, their profitability will rise further as oil prices increase from here.
Price Decreases
The Bureau of Labor Statistics noted the index for airline fares, used cars and trucks, medical care, and communication decreased over the month. Traders who read economic reports should interpret those falling prices as a lagging indicator. Airline stocks already accounted for peak summer travel. Since then, United Airlines ( UAL ) recently backed down from its 52-week high. American Airlines ( AAL ) fell by 16.8% from its high after posting record Q2 earnings .
Fitch upgraded American Airlines’ debt by two notches. The airline cut its total debt by around $9.4 billion from its mid-2021 peak. It has a goal of cutting total debt by $15 billion by the end of 2025 .
In the automotive space, lower used car prices will pressure internal combustion engine firms first. Already, Ford Motor ( F ) is down 17.4% in the last month, albeit on company-specific issues. That includes large recalls and a lower electric vehicle production run rate .
Margin declines at Tesla ( TSLA ) will increase pressure on the EV unit of General Motors ( GM ). GM needs to find new ways to cut costs to improve its EV margins .
Expect Another Rate Hike
Ahead of today’s CPI report, BlackRock expected persistent sticky inflation from persistent wage pressure . In other words, the asset manager considers July’s job report alongside the CPI report, just like the Federal Reserve does. Investors should expect another 25 basis point rate hike this year.
The S&P 500’s attempt to retake this year’s 4594 high or the ~4760 high from 2021 is immaterial for long-term investors. Its elevated valuation reflects ongoing bullish sentiment. Still, investors who increased their money market funds for at least 5.3% in annualized return during the 2023 rally need to exercise caution. They would need to give up that 5.3% interest income by betting for more upside on the index.
For further details see:
What The Fed Might Do After The July 2023 CPI Report