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A double whammy of PMI data yesterday pushed 'Peak Inflation' hopes to new highs.

From the S&P Global US Manufacturing PMI 👇

“With the exception of pandemic lockdown periods, July saw US manufacturers report the toughest business conditions since 2009.
A growth spurt in the spring has quickly gone into reverse, with new orders for factory goods down for a second straight month in July, leading to the first drop in production for two years and sharply reduced employment growth.

New orders down, production down and hiring slowing. Definitely looks like overall demand is slowing. The reasons cited shouldn't surprise anyone... 👇

“The rising cost of living is the most commonly cited cause of lower sales, as well as the worsening economic outlook. “Companies are also taking an increasingly cautious approach to purchasing and inventories amid the gloomier outlook, and likewise appear to be cutting back on investment, with new orders falling especially sharply for business equipment and machinery in July.

And the drop in demand is allowing supply (and supply chains) to catch up...

“Supply chain problems remain a major concern but have eased, taking some pressure off prices for a variety of inputs. This has fed through to the smallest rise in the price of goods leaving the factory gate seen for nearly one and a half years, the rate of inflation cooling sharply to add to signs that inflation has peaked.”

The last line got all of the attention for obvious reasons.

The picture was also backed up by the ISM data.

A huge 18.5% drop in the prices paid index. Worth noting that prices are still increasing, albeit at a much slower rate than before...

“The slowing in price increases is being driven by (1) volatility in the energy markets, (2) softening in the copper, steel, aluminum and corrugate markets and (3) a significant decrease in chemical demand.
Notably, 21.5 percent of respondents reported paying lower prices in July, compared to 8.3 percent in June,” says Fiore.

PMI's are a great leading indicator, but sometimes sacrifice clarity/detail for speed.

An Idiot’s Guide to PMIs
IHS Markit describes their ‘Purchasing Managers’ Index’ (PMI) as a survey-based economic indicator designed to provide a timely insight into business conditions, providing some of the earliest signals of economic performance.

Still, the direction of travel continues to be reinforced. Price pressures are starting to ease due to demand normalising and supply becoming less constrained.

Employment remains strong as "companies continue to hire at strong rates, with few indications of layoffs, hiring freezes or headcount reduction through attrition."

And last year's runaway shipping costs are slowly but surely dropping...


Plenty of companies are saying that price pressures are still a problem however, so price increases are still part of the plan. Here are just a couple of examples (among many this earnings season) via Samuel Rines 👇

High levels of credit card debt are adding to demand concerns.

A lot can be hidden in the averages, but unless people suddenly feel remarkably confident about the future (consumer confidence surveys are showing that they really don't), will demand significantly pick up?

The case is getting stronger. Especially when you throw gasoline prices falling by 30% in six weeks into the inflation mix.  

Peak Inflation = Peak Fed Hawkishness?

That's the narrative... 👇

Why would the Fed pivot so soon?

We've been here before...

While there's every chance that inflation will drop in July (TBC on 10th of August), that doesn't mean the battle's over.

The Employment Cost Index is running well above 5%.

Even if price pressures have peaked, can the Fed just sit back and wait for the long and variable lags of monetary policy to finish the job?

Especially when the labour market is still short of workers... 👇

With this in mind, Friday's NFP report can be framed both ways. More workers returning is good from the perspective of replacing lost productive capacity in the economy.

But more people back to work also delays the softening in the labour market that the Fed seems to be laser-focused on, meaning that the Fed pivot might be further away.

Most importantly, even though the Fed can perhaps make the case for a pause at the end of the year with rates around 3.5%, the jury's definitely out for any talk of a pivot.

Financial conditions have eased since the last Fed meeting (lower bond yields, higher equities) 👇

Continuing the trend that started in June...

Kashkari has already said that he's surprised by the market reaction to the 75bps hike, especially the pricing of cuts next year.

Mester, Evans & Bullard will offer their thoughts this afternoon too. Although there's no Fed meeting until September, that also means no blackout periods until the end of September either. Buckle up.

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