Global stocks traded higher this week following the Consumer Price Index (CPI) report for June. As of mid-week, the S&P 500 was higher by about 1.5% while the Dow Jones Industrial Average rallied more than 2%. In fixed income, lower yields translated into positive returns for bond investors, with the Bloomberg US Aggregate index higher by nearly 1%.
The highlight of this week was inflation data with the release of the CPI report Wednesday morning. Headline inflation rose 3% on a year-over-year basis, lower than expectations for a 3.1% increase. The key to this CPI report, from our perspective, was a drop in both the headline number, and more importantly, core inflation, which is what the Fed is focused on. Core inflation fell from 5.3% in May to 4.8% in June, a very encouraging print. Shelter inflation was one of the largest contributors to core inflation, rising 0.4% in June. The shelter component is known to lag actual rents and home prices by several months, and we expect softness in this category will help the Fed continue to push core inflation lower going forward. While we think it is still likely the Fed will raise rates 25bp at their meeting later this month, we think this will be the last hike in this cycle and rates will remain at the 5.25% - 5.50% range for some time.
Source: GSAM, CNBC, JPMorgan
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