Inflation report card
In the wake of the pandemic, inflation surged. A large swath of Americans had money and nowhere to go, so they bought stuff and manufacturers had a hard time keeping up. First, goods prices rose, then when lockdowns eased, costs of services climbed. Prices even rose at the fastest pace in 40 years, with the Consumer Price Index jumping to a 9.1% Y/Y rate in June 2022 and core CPI (excluding food and energy) hitting a peak of 6.3% that August.
Fast forward: Those dynamics have calmed down and inflation has eased, with CPI coming in at 4.0% Y/Y and core CPI at 5.3% in May 2023. That’s still double the Federal Reserve’s target of 2%, with FOMC officials signaling further rate hikes in an effort to cool the economy, and with it, the trajectory of prices. Traders, too, expect the Fed to raise its policy rate by 25 basis points to 5.25%-5.50% later this month, assigning a 92.4% probability to that outcome, up from an 86.8% probability a week ago, according to the CME’s FedWatch Tool.
Eyes are now on the latest bout of inflation data this morning as the U.S. Labor Department releases its June CPI report at 8:30 AM ET. Economists expect the headline number to only rise by 3.1% Y/Y in June, down from 4.0% in May, and core CPI to increase 5.0%, easing from 5.3% in the prior month. On a month-over-month basis, CPI is expected to rise 0.3% vs. 0.1% in May and core CPI is expected to increase 0.3% vs. 0.4% in the prior month.
SA analyst Christopher Robb sees “a real possibility” that CPI could fall more than the consensus. Used car prices fell 4.2% in June, the biggest monthly drop since early in the pandemic, according to the Manheim Used Vehicle Value Index. He also points to signs that worsening housing affordability could lead to a “double punch of relief to core inflation.” Others, like SA analyst Damir Tokic, expect inflation to resume and think the Fed’s decision to pause rate hikes in May was a mistake.
Fading effect: While economists focus on the CPI, the report’s influence on markets has been subsiding recently, according to SA analyst Mike Zaccardi. “Options traders have priced in about a 0.8% move up or down by Wednesday’s closing bell when analyzing at-the-money straddle price,” he said. “So, fireworks are not expected, but the Fed will surely pay close attention to inflation trends ahead of its July 26 rate decision.” (7 comments)
Big win
Videogame maker Activision Blizzard (ATVI) closed up 10% on Tuesday after a federal court allowed Microsoft (MSFT) to move forward with its $69B acquisition. “The Federal Trade Commission has not shown a likelihood it will prevail on its claim this merger may substantially lessen competition,” wrote Judge Jacqueline Scott Corley. “To the contrary, evidence points to more consumer access to Call of Duty and other Activision content.” SA Investing Group Leader Chris DeMuth called the ruling balanced, though the FTC is leaning toward appealing its loss. Microsoft has also offered to make a small divestiture to address U.K. antitrust concerns as it shoots to get the deal over the finish line. (43 comments)
Suicide risk?
The European Medicines Agency’s investigation into reports of suicidal behavior linked to Novo Nordisk’s (NVO) weight loss and diabetes drugs has been extended to include other GLP-1 receptor agonists. The probe began earlier this month after the Icelandic Medicines Agency flagged reports of suicidal thoughts and self-injury linked to semaglutide and liraglutide, the active ingredients of Novo’s blockbuster drugs Wegovy/Ozempic and Saxenda. The EMA expects to conclude its review in November. Other GLP-1 receptor agonists on the market include Eli Lilly’s (LLY) diabetes therapy Trulicity and Sanofi’s (SNY) Adlyxin. (28 comments)
Deceptive practices
The Consumer Financial Protection Bureau is continuing its crackdown on banks overcharging fees on consumer accounts. Bank of America (BAC) has been ordered to pay more than $100M to customers for allegedly charging “junk fees, withholding credit card rewards, and opening fake accounts.” The Office of the Comptroller of the Currency also alleged that the bank’s “double-dipping” on fees was illegal. Meanwhile, BofA’s Merrill Lynch unit agreed to pay a $6M penalty to settle SEC charges that the firm failed to file Suspicious Activity Reports from 2009 to late 2019, as well as a separate $6M fine to settle charges brought by FINRA. (26 comments)
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