CPI and Initial Jobless Claims Sata in a Sweet Spot

What will it be today? A buy-the-dip rebound effort that holds up or a buy-the-dip rebound effort that fails? Everybody will know the answer to that question at 4:00 p.m. ET, yet the indication ahead of the open is that there is going to be a rebound effort on the heels of yesterday’s late sell-off.

Currently, the S&P 500 futures are up 28 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 133 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 195 points and are trading 0.6% above fair value.

The bulk of these gains were in place before the release of the Consumer Price Index and Weekly Initial Jobless Claims reports at 8:30 a.m. ET, reflecting a mechanical buy-the-dip trade that has persisted in the absence of any shocking fundamental news that defies the conventional soft landing, peak rate, trough earnings views that have been the fuel for this year’s rebound effort.

Not surprisingly, the futures trade was supported by gains in the mega-cap stocks, which struggled in yesterday’s action. Some positive price action in Dow component Walt Disney (DIS) following its earnings report, some M&A activity that featured Tapestry (TPR) acquiring Capri Holdings (CPRI) for $8.5 billion, or $57.00 per share, in cash, and optimism that the CPI data would support an on-hold Fed policy were added support factors.

That support didn’t get pulled after the CPI and initial jobless claims data. Both were in the sweet spot of furthering the case that the Fed can stay on-hold at the September FOMC meeting.

Total CPI was up 0.2% month-over-month in July, as expected, and core-CPI, which excludes food and energy, was also up 0.2% month-over-month, as expected. On a year-over-year basis, total CPI was up 3.2%, versus 3.0% in June, and core CPI was up 4.7%, versus 4.8% in June.

There were several key takeaways from the report: (1) there were no hawkish surprises as total and core CPI were spot-on with consensus estimates (2) the shelter index accounted for more than 90% of the increase in the all items index and (3) the all items index less shelter was up just 1.0% year-over-year on an unadjusted basis.

There will be some calls that next month’s report won’t look as friendly given the jump in oil and gas prices, but for the time being, the July report offered enough validation for the Fed not to jump to any rate-hike conclusions.

The same can be said for the jobless claims report. Initial jobless claims for the week ending August 5 increased by 21,000 to 248,000 (Briefing.com consensus 230,000) while continuing jobless claims for the week ending July 29 decreased by 8,000 to 1.684 million.

The key takeaway from the report is that, while initial claims are still running well below recession-like readings, they moved in a direction in the latest week to corroborate the thinking that there is some softening in the labor market, which is what the Fed expects to see (and hopes to see).

There was some knee-jerk action in the Treasury market following the data. The initial response was positive, sending yields lower, and then the secondary response was to sell into the initial response. Overall, yields are little changed from where they were just ahead of the releases. The 2-yr note yield is down three basis points to 4.77% and the 10-yr note yield is down one basis point to 4.00%.

Notably, the probability of a 25-basis points rate hike at the September FOMC meeting, which was at a low 15% just before the releases, is at 9.5% now, according to the CME FedWatch Tool.

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Originally Posted August 10, 2023 – CPI and Initial Jobless claims data in a sweet spot