Inflation continues to cool

The Consumer Price Index (CPI) came in at 0.20% month over month, and 4.7% year over year for the Core CPI. This was in line with expectations and shows a continued gradual decline. Core CPI excludes the price of food, which was up 4.9%, and energy, which was down 12.5% over the prior year. An important outlier was shelter, which was up 7.7% over the prior year.

• The market continues to be focused on inflation as it is the best indicator of what the Federal Reserve may do with interest rates
• If you consider current market projections, there is only a 10% expectation of another hike at the next meeting and a 30% chance of another hike at either of the last two remaining meetings of the year
• We don’t think the incremental 25 bps is that relevant, however more important is how long interest rates stay at the current levels
• With inflation still above the Fed’s 2% target and with energy prices rebounding recently, it is unlikely that we will see any rate cuts soon
• This is important given any debt that matures, whether it be government, corporate, or consumer, which was priced in the prior low-interest rate regime, will need to be refinanced at these much higher rates
• This leads to a significantly higher interest rate cost across all the aforementioned stakeholders - for some, it may not be sustainable

China economy shows weakness - US announces new restrictions

China reported a large decline in imports and exports in July from a year ago. Exports fell 14.5%, and imports dropped 12.4%, both worse than expected. Staggeringly, exports to the US fell by 23.1% year-over-year and 20.6% to Europe. At the same time, the Biden administration announced additional restrictions on US investment in China in areas including semiconductors, quantum computing, and artificial intelligence.

• For the last two decades, China has been an economic powerhouse for the global economy
• This is not as likely to be the case in the coming decade
• Adding to their economic woes, the Western world, led by the US, continues to de-globalize
• Recognizing that we are in an arms race of sorts in the three specific areas the Biden administration identified, the new restrictions are logical
• However, this will put additional pressure on China’s economy at an already precarious time
• The risk is that China responds by taking military action, for instance, the widely discussed invasion of Taiwan
• Such a move would be devastating and opens many un-anticipated outcomes

US credit card debt hits $1 trillion

Americans’ total credit-card balance his $1.03 trillion in the second quarter, the highest level ever. This was an increase of 16.2% over last year and 4.6% over the prior quarter. Roughly 7.2% of credit card accounts were 30 days overdue, an 11-year high.

• The consumer is what has kept our economy humming along, even with the most aggressive interest rate hikes in modern history
• The initial resilience was due to excess savings retained during the pandemic
• This source of spending was slated to be exhausted this year
• Given the large increases in credit-card balances, it seems the consumer is now borrowing to continue to spend
• This comes at a time when the average credit card interest rate is at ~21%
• As discussed above, this may not be sustainable for some, and the rising delinquency numbers are an indicator

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