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Stocks jumped Thursday after the latest Consumer Price Inflation data for July revealed a relatively tame increase of 0.2%.
While investors may be cheering a benign report that was largely in line with Wall Street expectations, there are signs that the volatile energy components are inflecting again, with important ramifications for Fed policy and investor portfolios.
Last June, headline CPI, which includes the volatile energy and food prices, peaked at 8.9% — a four-decade high — and has descended rapidly since then.
Given the peak was 13 months ago, the comparisons from one year ago are now declining. This means that base effects are making further year-on-year declines less likely as long as the month-over-month numbers are still increasing (which they are).
Indeed, the year-over-year headline inflation number increased to 3.2% from 3.0% in July. And for the two most recent reports in June and July, energy was a net addition to inflation instead of a cooling factor, as it largely had been since July of last year.
In the latest CPI report, fuel oil was up a whopping 3.0% for the month, even though it crashed 26.5% year over year. Similarly, utility gas was up 2.0% in July but down 13.7% from a year ago. The closely watched gasoline component crashed 19.9% from last year but inched up 0.2% for the month.
The monthly rise in energy subcomponents is not necessarily worrisome by itself. But short-term charts of crude oil, natural gas — and even the entire commodity complex overall — are screaming “bullish” and point to larger potential increases in the inflation statistics in the months ahead.
That’s inflation that could prompt the Fed back into action that the market is not expecting.
Consider that WTI crude oil (CL=F) just surged to nearly $85 — the highest price since November 2022 and a 23% increase over the last six weeks. Similarly, natural gas futures (NG=F) just hit $3 for the first time since January.
And a broad measure of commodity prices called the S&P GSCI Index (^SPGSCI) is also punching up to the highest levels since late January — poised for a breakout after crashing nearly 40% from its 2022 peak.
Stock market investors also seem to be preparing for sustained energy outperformance. The S&P Select Energy SPDR Fund (XLE) is the best-performing large-cap sector of both the current month and quarter. As recently as May, energy was one of the worst-performing sectors of the year.
Investors may have become comfortable with a Fed that stays the current course, keeping short-term rates “higher for longer.” However, investors have decidedly not priced in a Fed facing another bout of rising price inflation, which would likely require hiking its benchmark rate to 6% or beyond.
Not to get too far ahead of ourselves, energy futures could reverse once again. A false breakout on the charts would confound traders and take pressure off the inflation stats for a time.
However, if energy commodities continue to trend upward, a wholesale repricing of market expectations on the economy would seem inevitable.
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