Hi YXI friends,

It’s been over 24 hours after the CPI. The market has bounced higher after an intraday selloff yesterday.

The overall pattern this week conforms with our seasonality analysis, on the back of easing Fed liquidity.

Let’s now review Wednesday’s CPI print, its implication on the upcoming FOMC, and the chart analyses of TLT, SPY, AMZN, NVDA, BTC, and SLV.

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1. Core CPI Surprised to the Upside, But In Line with Our Expectation

Yesterday’s Headline CPI for June came in line with the expectation, largely helped by falling energy prices. Core CPI, however, surprised to the upside, with an increase of 0.3% MoM.

In my Webinar on Tuesday, we highlighted the Core CPI’s risk to upside due to increased rent and higher wage growth in August.

The majority of CPI is driven by Shelter costs, with Owner’s Equivalent Rent (OER) dominating this category. OER increased by 0.5% MoM (vs. 0.4% in July), now looking sticky if not reaccelerating.

The problem with OER is its fictitious nature. For Rent, BLS surveys the actual rental payment for each month. However, for OER, BLS asks house owners theoretically, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

There tends to be a consistent upward bias in the survey results of the house owners responses versus the tenants, by anywhere between 20 and 50 basis points, after BLS’ own quality adjustments.

Motor vehicle insurance, on the other hand, slowed in August. It should further trend down as vehicle sales are in firm deflationary territory.

Finally, the rebound in services inflation (0.1% MoM) looks fine, after printing three consecutive “0% MoM”s. A further drop in this component could incite recessionary fears.

Key takeaway:

The key takeaway from CPI, combined with Friday’s Nonfarm Payrolls, is that the Fed does not need to cut by more than 25bp in September.

I also think Powell likely pushes back on subsequent 50bp cut expectations.

2. Rates Are Richly Priced

(Note: Rich means bond prices are high and yields low.)

The rates market has priced away the odds of a 50bp cut pretty much completely for September.

However, the market still sees potential 50bp cuts in November, December, or January - in fact in at least two of these three meetings.

I think the FOMC’s dot plot will push back on this expectation. I don’t see the FOMC members moving their dots from a median of 1 × 25bp cut, to more than 3 × 25bp cut by the year end.

3. Treasury ETF - Bagging Gains

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