The Week That Was and the Week That Is: Front End vs Long End

There are weeks when the macro story is obvious because every market says the same thing. This was not one of them.

July’s (released in August mostely) data gave the Federal Reserve more room to wait, the front end accepted that message and equities remained near record highs. But the long end, oil and parts of FX refused to validate a clean disinflationary relief trade.

That divergence was not noise. It was the most useful information the market gave us.

The week began with Brent jumping almost 5% as the reopening of the Strait of Hormuz remained uncertain. By Friday, it had settled at $88.52, up roughly 6% for the week. That put the current inflation impulse in direct conflict with the backward-looking data about to arrive.

July CPI could show whether inflation was improving before the latest energy move. It could not tell us how much of that shock will pass through into goods, expectations or policy. Oil was the leading signal; the inflation releases described an earlier state.

On its own terms, CPI was supportive. Headline inflation rose 0.1% in July, core rose 0.2%, and core eased to 2.5% year on year. Shelter contributed most of the monthly increase, while energy fell 1.5%.

That weakened the immediate case for another hike and showed underlying inflation moving in the right direction. But headline inflation remained 3.4%, and the favourable energy contribution belonged to July rather than the world investors were trading by Friday.

PPI reinforced the point, with more contradiction beneath the headline.

Final demand was unchanged and goods prices fell 0.7%, largely because of energy. Yet the measure excluding food, energy and trade services rose 0.4% on the month and 4.7% over the year.

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