The cleveland Fed halts its forecast at Q2

Today we get PPI, industrial production and the Beige Book. PPI may offer a counterweight to CPI, despite PPI not feeding CPI by much in the US. The forecast for PPI is 0.2% m/m and 2.5% y/y, with core at 2.7% from 3.0%.

But attention still lingers on CPI, which was as confusing as any data ever gets.

Treasuries were in a tizzy yesterday. Immediate rate cut hopes vanished when CPI showed some tariff effects and the 30-year went a hair over 5% on inflation worries—but didn’t stay there. We can’t expect any guidance from the Beige Book; the Fed is in the same swamp as the rest of us. It can turn into a sinkhole when Trump names Powell’s successor, which is expected any day.

We are still stuck in the mud. Yesterday brought forth an amazing range of CPI descriptions. Clearly anti-Trump news outlets (like the NYT) call inflation “accelerating.” The Washington Post writes “Inflation picked up in June as tariffs began to lift prices across the economy.” The FT has “US inflation reaches 2.7% as Trump tariffs hit.” But then Bloomberg masks bias with “US core CPI rises less than expected again on drop in car prices.” Later in the day, Reuters had “Fed’s inflation fears start to be realized with June CPI increase.”

So, are we getting tariff inflation or not? An outfit named Inflation Insights says ex-autos, core goods prices climbed 0.55% in June — the biggest monthly advance since November 2021. “Today’s report showed that tariffs are beginning to bite.”

What was truly under the expected was the core m/m at 0.228% when 0.3% was forecast. Cars and shelter get the credit. You can find plenty of analysis on services perhaps dipping enough to offset goods prices, but tariffs came in only in April and given inventory builds, it will take until August to see results.

Bloomberg goes on, “..  the slew of below-forecast inflation readings raises questions as to how broadly President Donald Trump’s tariffs will impact consumer prices. …. The weaker-than-expected number could draw even greater calls from Trump for the Federal Reserve to lower interest rates.” Some analysts go with the Fed—the tariff effect will be a one-time shock.

The news outlets and even some analysts don’t know what to make of the numbers. The stock market did—it’s the beginning of something big. We don’t know what inflation will be by year-end, but economists say it simply must be higher, and by a lot, like 4-4.5%. There’s no way the Fed can justify rate cuts.

But see the inflation chart. It’s not actually too scary. What if the public thinks it’s okay—as we are seeing in consumer polls? Note that we get another survey this week. The Cleveland Fed halts its forecast at Q2, which is already over. The NY Fed has the one-year forecast at 3.0%. In fact, most one year forecasts land at 3% or thereabouts.

This is not enough to set consumer’s hair on fire. It’s also too much to justify rate cuts. ING has a sane and reasonable take: “A slightly softer-than-expected June core inflation reading keeps alive the chances of a September Federal Reserve interest rate cut, but the risk is that we get less benign prints for July and August. That means we will need to see clear evidence of softer jobs figures to trigger Fed action before December.”

ING then goes on to propose an original forecast, and we like it even though it ain’t gonna happen: “…  interest rate cuts will eventually come. The cooler growth environment with a softer jobs narrative and weakening wage pressures will help ensure that inflation is indeed temporary.

“Moreover, the shifting dynamics of the housing market will mean housing costs, which have been a major driver of inflation in recent years, will increasingly become a source of disinflationary pressure as hinted at in the chart above using the Cleveland Fed’s new tenant rents series.

“With the risk that unemployment does start to climb later in the year in response to intensifying growth headwinds, we believe the Fed will be much more comfortable with cutting interest rates from the December FOMC meeting, kicking off with a 50bp move.”

So, no cuts until December but then a whopping 50 bp. This may seem an extreme (if appealing) idea and it flies in the face of Trump taking action about Powell far sooner than that. Yesterday Trump demanded a 3% cut in rates. He is not waiting for 1% in December. 

Fed funds traders know it, too. The probability of a cut in Sept has dropped from 65.8% a week ago to 52.6% this morning, according to the CME FedWatch tool.

Another angle: The WSJ reports “Americans as of Sunday faced a 20.6% average effective tariff rate, according to the Yale Budget Lab, the highest since 1910. The full effect of the tariffs might not be felt for months because of importers’ prior stockpiling, long shipping times and Trump’s mercurial dealmaking. But the Yale Budget Lab projects resulting price increases could amount to the equivalent of a $2,800 hit in yearly household income.”

How can the Dems botch the mid-term elections with this strong a tailwind? 

Tidbit: The Japanese yen is again at risk of testing the line in the sand at 150. We expect blowback of some sort, perhaps intervention, perhaps something on trade, perhaps another kind of government interference (like buying more government paper, although it’s already choking on it). 

Tidbit: Bloomberg reports that if the EU can’t make a decent deal, it has an arrow in its quiver—the “anti-coercion instrument” that gives officials” broad powers to take retaliatory action, including new taxes on US tech giants, targeted curbs on US investments, and limiting access to the EU market.” Then it will be “war,” indeed. Our local supermarket has Irish butter at $9.30 for ½ pound. This is more than double the pre-Trump price.

Forecast

We are waiting for the trigger that will set off the dollar downmove again. It could well be Trump naming the shadow Fed chair. Funny, the stock market will likely take that in stride—the UK has had shadow ministers for decades—but the bond and FX markets won’t like it one bit.

Or it could be new tariffs on pharmaceuticals/chips, and some other Shock. Trump thinks his ability to deliver Shocks is a badge showcasing his power. The rest of the world sees it as childish, ridiculous and pathetic—and a danger to economies.

The dollar has a strong tailwind in the form of the 10-year yield on the rise. See the chart in the Chart Package. It will take some powerful counter-measures to offset it. The preferred measure would be the stock market tanking again and getting Trump to relent, but so far the stock market believes he will chicken out in the end, anyway.

We are nearly at a tipping point. Start getting square.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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