Australian dollar goes bananas on weak US inflation

DXY crashed last night and broke support. EUR to the moon:

AUD launched:

Along with the Crap Complex of dirt, miners, EM and junk:

Treasuries were bought bigly:

Stocks broke out:

The trigger was soft US inflation. JPM:

The June CPI surprised favorably, with both the headline and core figures up 0.2%,a tenth shy of expectations. (To more precision, core increased 0.158%, the softest since early 2021.) The headline year-ago figure slipped from 4.0% to 3.0% and core went from 5.3% to 4.8%. Core goods prices in June were down 0.1%, and core service prices increased only 0.3%, the softest since Sept 2021. Powell’s super core—core services ex-rents—was flat last month, also the lowest reading since Sept2021. One can play the game of excluding other carefully selected categories from super core, but more disciplined measures of the central tendency of inflation—median: 0.35%, trimmed mean: 0.20%, sticky: 0.24%—are all similarly at their lowest since around mid-2021. By our reckoning core PCE looks to have increased0.21% last month.

With the usual caveat of one month not making a trend, the narrow path to a soft landing looks a smidgeon wider this morning. Core CPI is already off 1.7%-points from its high. The standard models predict that the next 2-3%-points of disinflation will require a significant employment sacrifice, but those models missed both therun-up and partial climb down in inflation. There may be a few doves on the FOMCwho would be willing to see how far this process can run without additional tightening, but we expect that the Fed leadership is still strongly inclined to hike in two weeks, and we look for an additional 25bp move later this month before the Committee goes on extended pause.

In the details of the report, energy prices were up 0.6%, supported by a 1.0%increase in gasoline prices. Food prices continued their recent trend of more modest increases, up only 0.1% last month. Food away from home (which if you had to choose would be a good “desert island” indicator of trend inflation) was up 0.4% last month, still above the pre-pandemic trend but about half of what it was running in the second half of last year. In the core bucket, core commodities were down 0.1% last month. Used car prices were down 0.5%, close to our expectation. This category was up 9.1% over the prior two months, and industry data indicate that prices should continue to fall in coming months. New vehicle prices were flatlast month. Most indicators of pipeline pressures—PPI, import prices, supplier deliveries—suggest goods price inflation should remain tame in coming months. In core services, both tenants’ rent (0.46%) and owners’ equivalent rent (0.45%), continue to creep lower. Both lodging (-2.0%) and airfares (-8.1%) were down notably last month. Education services were up a modest 0.2% last month and communication services fell 0.5%.

Inflation is still not licked but it would be curmudgeonly to not accept significant progress in this report, especially since second-hand cars, travel and rents all have further downside ahead.

I agree with the assessment that the Fed will go again and then stop.

This opens up the possibility that the “US dollar smile” phenomenon is underway in earnest and a new cycle of weakness is upon us a little earlier than I expected.

If so, it is AUD to the moon on global reflation hopes before the dour China reality returns in due course.