August 2, 2022
The prices paid component in yesterday’s ISM manufacturing survey for July declined by a record -18.5 points MoM to 60.0. ISM is a business survey, so the inflation relationship flows to PPI, which tends to lead CPI data by ~3 months. Headline ISM (and PMI) leads actual business activity, so it’s reasonable to assume some lead time with sub-components like prices paid. We’ve been arguing that sustained S&P 500 levels beyond 4150-4200 likely requires terminal Fed expectations to decline from ~3.38% currently to something at/below 3%. Taking terminal Fed expectations to/below 3% required lower realized inflation. There are two CPI prints before the September FOMC meeting and there should be enough deceleration from recent energy/food price declines and simple base effects to substantiate a slower pace of rate hikes. The Fed funds rate currently sits at 2.50%, so a 3% terminal rate likely implies a 50bp September rate hike and pause through year-end. A dovish pivot in September may also require realized inflation to miss consensus estimates. Consensus for next week’s July headline CPI print is looking for +0.3% MoM (+1.3% in June) and a core rate (ex food/fuel) of +0.6% MoM (+0.7% in June).