Mid-Market Update: Inflation not ready to peak, Record low for Consumer Sentiment

US stocks tumbled after a hot inflation report removed any chance for the Fed to pause tightening in September.  Inflation hit a fresh 40-year high at 8.6%, much hotter than the highest estimate, and probably still not the peak. CPI readings are skyrocketing and unfortunately that may continue for another report or two as shelter, gasoline, and food prices are the biggest drivers.

This was a very bad inflation report for both the White House and Fed.  The White House will watch how democrats fare with next week’s primaries.  The Fed’s latest mistake is that they did not act strongly to cool inflation, and they will now be forced to deliver more rate hikes as inflation is clearly not transitory and not ready to peak. 

Stocks extended declines after consumer sentiment plunged to a record low and inflation expectations surged.  Sentiment plunged 41.3% Y/Y, and consumer expectations fell 44% y/y.  Stagflation is becoming the base case for many traders. Consumer financial situations worsened about 20% and that does not bode well for consumer spending. 

CPI

A Labor Department inflation report proved many traders were wrong with identifying peak inflation.  Everything came in hot today with today’s CPI data, the monthly core reading, the headline number, and a much stronger dollar will further fuel inflation here.

A new peak for year-over-year inflation of 8.6% helped invert the 5- to 30- year spread. Money markets are now pricing in a half-point rate increase for the September meeting, which makes the Jackson Hole Symposium very unlikely to be an opportunity for the Fed to change their tightening course.

The inflation report shows that pricing pressures are also impacting services, which comes as no surprise as Americans begin taking vacations.  Used-vehicle prices also snapped a 4-month streak of declines with a 1.8% gain in May. 

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