Weekly Update 09/13/2024: Inflation Figures Point to Rate Cut
- Apple unveils newest iPhone and other upgraded gadgets
- Boeing deal rejected by union members
- Banking regulations update
- UPS makes acquisition
- New COO for Microsoft
Consumer and producer prices
The Bureau of Labor Statistics (BLS) reported on Wednesday that the headline consumer price index (CPI) rose 2.5% in August from a year-earlier, below the 2.9% figure in July. Excluding food and energy, the yearly change was in-line with expectations at 3.2%. The three-month annualized rate rose 2.1%, up from July’s 1.6% pace according to Bloomberg calculations. The main factor in the overall advance were shelter costs. They rose 0.5% last month, the most since the start of the year. Owners’ equivalent rent, which is a subset of shelter and the largest individual component in the CPI calculation, also rose at a 0.5% pace for the month. Excluding housing and energy, services prices rose 0.3%, the most since April. Core goods prices, which exclude items like the more volatile food categories and energy commodities, fell 0.2% last month. Thus, the overall index has exhibited deflationary tendencies because the price of goods has declined in 14 of the past 15 months.
The figures fell mostly in-line with Wall Street expectations, but they did lessen the odds that the Fed would do a “super-size” cut at next week’s Federal Open Market Committee meeting. Trading in the futures market reduced the probability of a 50 basis point (0.50%) cut to near zero, but the likelihood of a 25 basis point reduction remains close to certain. Fed officials prefer using the personal consumption expenditure (PCE) measure which places less of an emphasis on shelter than the CPI does. That is why July’s PCE annual core figure excluding food and energy was 2.7% which is much closer to the Fed’s 2% inflation target. The next PCE figure is not due out until the last Friday of the month.
Wholesale prices rose 0.2% in August according to the BLS report released yesterday. The median forecast in a Bloomberg survey of economists called for a 0.1% rise. Year-over-year the stat rose 1.7%. Excluding food and energy, the index rose 2.4%. The yearly figures were in-line with estimates. Within the headline figure, the price of producer services rose 0.4% while the price of producer goods was unchanged thanks to a sharp drop in energy prices. The cost of processed goods for intermediate demand fell 0.1%. The main takeaway was the Fed seems to have a clear path for cutting rates next week, and the mostly expected figures hint against a super-size reduction. Internationally, the European Central Bank cut its key deposit rate by 25 basis points as expected with inflation receding towards 2% in the European Union. The group also lowered their growth outlook going forward given the continued hostilities in the Ukraine and the Middle East. “The gradually fading effects of restrictive monetary policy should support consumption and investments,” said ECB President Christine Lagarde. Over half of the world’s advanced economies, as defined by the International Monetary Fund, central banks have already cut rates.
Bank regulations
In a crucial revision, the Federal Reserve will make sweeping changes to its bank-capital rules proposal. The Fed will require that the largest banks—such as JP Morgan Chase, Bank of America and others—would now face a 9% increase in their capital cushion against financial shocks versus the 19% hike regulators had proposed earlier. Additionally, small lenders (with assets between $100-$250 billion) would be exempt from certain portions of the requirements. Wall Street organized a massive lobbying effort when the proposed plan was released in July 2023 to change the bill arguing it would create a significant burden for their business operations and handicap them versus international banks and nonbank lenders. While the revised plan has yet to be made final by its authors—the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency--this is the first indication that the troika is willing to make adjustments. The complete revisions will be released likely sometime next week followed by a comment period which could last up to 60 days according to Fed Chair Jerome Powell.
The proposal’s genesis came from Basel III, an international agreement that was implemented after the 2008 global financial crisis. Similar to the U.S., many banks based overseas faced failures and a crisis of public confidence following that event. The recent proposition was also meant to address some of the weaknesses exposed by the collapse of Silicon Valley Bank and Signature Bank in March 2023. In the subsequent years, U.S. banks have solidified their balance sheets through not only capital raises but also stricter lending standards and profitable operations. The annual “stress tests” run by the Fed highlight the vigor of today’s banks and provide a public release of their sturdiness under hypothetical traumatic circumstances.
Even if the revision to the proposal gets approved, there is no guarantee it will go into effect. Congress can overturn the rule through a Congressional Review Act resolution. The compliance date could be pushed off years into the future nullifying the effect and providing a window for a future Congress to capsize it. The banks could also go to court and sue their own regulators but that is unlikely. What is the risk to the financial system if it does not get implemented? Obviously, it will be higher than if no additional capital requirements are in place. However, given the adjustments and fortifications mentioned, we believe the current requirements, reviews and regulations are sufficient to maintain a sound financial system. We will continue to monitor the situation and report any value-added information.
Company Events
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