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Why the biggest CPI drop since 2020 still leaves a hike on the table… the market doesn’t seem all that happy… what the futures market believes… a free look at a market timing tool from TradeSmith
This morning, we got the June Consumer Price Index report, and it was genuinely good.
Headline CPI fell 0.4% for the month – the biggest monthly drop since April 2020 – pulling the annual rate down to 3.5% from May’s 4.2%. Economists had expected a much smaller decline.
Meanwhile, core CPI, which strips out food and energy, was flat on the month, and its annual rate fell to 2.6%, well below the 2.9% consensus. Forecasters had actually expected core to rise slightly – this was an unusually large miss in the other direction, the kind we haven’t seen since a data quirk during last fall’s government shutdown.
And this wasn’t a one-category fluke…
Shelter, the largest piece of CPI, rose just 0.1% against a typical 0.3% pace. Services overall were flat. Goods prices slipped. Overall, it was a broad, genuine cooldown.
As I write in the early afternoon, the S&P and Nasdaq are higher but not soaring, and the Dow is down. It’s certainly not the blowout reaction you might expect after these cool numbers. But once you look at what futures traders are pricing for the Fed’s next several meetings, you’ll understand why.
What’s driving the good news – and why it might not fully repeat
A meaningful slice of today’s relief may not fully repeat.
Gasoline fell nearly 10% in June as the U.S.-Iran ceasefire held and Gulf shipping eased. That ceasefire has since collapsed.
With the two sides exchanging strikes over the Strait of Hormuz, West Texas Intermediate is up to $79 and Brent is at nearly $85 as I write. The longer that drags on, the more likely energy costs will start climbing again.
So, one very good month – driven mostly by a ceasefire that’s already broken – isn’t the kind of evidence that resolves anything at the Fed.
Least of all for Federal Reserve Chairman Kevin Warsh…
What Warsh will actually focus on
Regular Digest readers know Warsh doesn’t look at inflation reports the way the headlines do.
In our June 25 issue, we highlighted how he’s called the headline Personal Consumption Expenditures number little more than a “rough swag,” and that he watches the Dallas Fed’s trimmed mean instead – a measure built specifically to filter out exactly the kind of one-off swings driving today’s number.
In our July 2 issue, we quoted him at the European Central Bank’s Sintra forum:
We’ve all looked around, and we’ve seen that prices are too high.
And from his very first press conference, we’ve highlighted his skepticism of any single inflation print before revisions settle it – what he called an “echo of history.”
Today, we got to see how Warsh thinks about inflation in real time. He delivered testimony this morning to the House Financial Services Committee, after the CPI data dropped, and he didn’t move an inch:
While monthly price fluctuations are inevitable — especially in an unsettled world — underlying inflation over longer time horizons is determined largely by monetary policy.
The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability.
He called this a “hinge point in history,” and described the Fed’s objective almost poetically:
The Fed’s number one objective is to get monetary policy right — or as near to it as we possibly can. That is our clear and constant aim, the star we steer by.
And if we get policy right – and we will – the inflation surge of the last five years will be a thing of the past.
That’s not a Fed chair reacting to this morning’s cooler readings. That’s a Fed Chair repeating, almost word for word, the framework we’ve been describing since June.
He isn’t the only one at the Fed still sounding cautious. This week, Fed Governor Christopher Waller said that the Fed’s own preferred core measure had climbed from 3% last December to 3.4% in May. He warned that another hot core reading would force the committee to consider tightening further.
On the other hand, New York Fed President John Williams said that if core inflation holds near a 0.2% monthly pace for the rest of the year, a hike might be avoidable.
Today’s flat core print is exactly the kind of reading Williams wants to see – but it’s one month, and Waller’s warning was about a pattern, not a single data point.
That’s the real state of play inside the Fed right now: genuinely divided, not newly aligned.
So, one good print doesn’t erase Waller’s concern any more than it validates Williams’s – it just gives both men a data point to argue about at the next meeting.
What the futures market actually believes
How are traders viewing Fed policy in light of this morning’s data?
The next Fed meeting, July 29, just got meaningfully de-risked – hike odds collapsed from a near-coin-flip 42% yesterday to just 12% today.
But look further out and the picture barely budges…
September hike odds fell from about 75% to 60% – still more likely than not to bring a hike, not a hold.
And when we look farther out to December, the cumulative odds of at least one hike didn’t change much. They fell from about 89% yesterday to just 80% as I write.
So, what’s the takeaway for investors?
Today’s data is encouraging, but if it has you tempted to chase rate-sensitive names on hopes of a broader dovish pivot from the Fed, the futures market itself says that’s still early.
Of course, if there’s one thing the futures market has been wrong about many times over the last several years, it’s Fed policy.
A second unresolved debate
Inflation isn’t the only thing on Warsh’s plate, and this deserves a mention before we move on.
In his testimony, Warsh spent real time on AI – not as a jobs story, but as an inflation one.
He called the pace of AI-driven business investment “the most striking feature” of the current economy and predicted “what is now called ‘AI investment’ will soon be called just ‘investment.’”
He’s previously said he expects the coming AI productivity boom to prove disinflationary over time – lowering costs economy-wide.
Not everyone at the Fed agrees…
Multiple officials have flagged the AI data-center buildout itself as a source of upward price pressure – on memory chips, semiconductors, and electricity.
For example, here’s John Williams:
If [AI] creates a sustained impulse to demand relative to supply in inflation, I do think that’s the kind of situation where you don’t look through this.
This isn’t abstract. As we’ve covered here in the Digest, Apple (AAPL) recently announced price increases for its Mac and iPad lineup – directly citing the AI-driven memory chip shortage.
So, AI now sits on both sides of the ledger Warsh must balance – a disinflationary force by his own long-term thesis, but an inflationary one by his own colleagues’ near-term read.
Legendary investor Louis Navellier threw in his two cents on the debate this morning. He believes AI will be a disinflationary tool like Warsh – and that the rate hikes the market is pricing in today won’t materialize.
From this morning’s Flash Alert in Accelerated Profits:
The Fed’s not increasing rates. So, whatever the talking heads on TV have been telling you, that’s not happening.
Also remember, AI is not inflationary. It’s temporarily inflationary in memory. That’s a freak thing because of a bottleneck.
But other than that, no. AI is going to be creating incredible productivity gains, lots of GDP growth, and that’s that.
So, what’s the bottom line on the CPI report then?
It’s good news – genuinely.
But good news and a resolved story aren’t the same thing.
While the Fed’s next meeting just got a lot easier, September and beyond still lean toward a hike, even though Louis has taken them off the table.
One last thing…
We don’t know exactly when Warsh & Co. will move on interest rates – if at all. But our friends at TradeSmith think they’ve found one corner of the market where timing isn’t a guessing game.
CEO Keith Kaplan and his team have built software that scans thousands of stocks for historically favorable buying windows – calendar stretches where a stock has risen with unusual consistency, year after year.
Run through an 18-year backtest, trading only inside those windows produced 857% in total growth – more than double the S&P 500 over the same stretch – and the strategy still came out ahead even in 2007, the worst year in the test.
Keith is walking through the full research this Thursday, July 16, at 10 a.m. ET, alongside Louis Navellier, who’s pairing these timing signals with his own stock-grading system. You don’t have to wait until then to see it in action – you can test drive the software for free right now by signing up here.
I’ll note that attendees at Thursday’s event will also get three free stock picks, plus one Keith says to avoid. Just click here to register and we’ll see you there.
Have a good evening,
Jeff Remsburg
(Disclosure: I own AAPL)
