Specialty Capital News & Views 16th August

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As expected and in line with one of our previous posts, CPI has come down from the June high of 9.1% to 8.5% in July.  Breaking down the headline number, core cpi was 5.9% (ex food and energy). Food and fuel inflation continue to be the biggest drivers, if you zoom in on the food index, it is up 10.9% YoY.  Butter is up over 25% YoY, coffee is up 20%, poultry and meat products are up double digits.

What was encouraging to see from the report was the 0.5% wage increase month-to-month. The better-than-expected CPI report caused yields to come down yesterday as futures are pricing in a lower likelihood of a 75 bps rate hike. Specialty Capital believes a rate hike of 50 bps will be delivered by the FED in September.

Gas prices at the pump have also continued to come down (-11%) in July, though still up 44% from a year ago. Early this morning, the AAA released the national average cost of a gallon of regular gasoline – it now stands at $3.99. Moreover, earlier this week there was a New York Fed Survey report that indicated that consumers have pared back inflation expectations for the future.

Today’s PPI report showed that prices fell 0.5% from the previous month, to 9.8% YoY, another surprise relative to market expectations. This was the lowest increase on an annual basis since October 2021. Jobless claims released earlier today also showed some strength as we printed below estimates (262K). This is painting a picture that we may be heading to a soft landing and the Fed’s rate hikes (albeit a bit too late) are working.

The Nasdaq is now up over 20% from the June lows as inflation is ebbing and there is optimism across the board from market participants. There are those that say we are in a bear market rally.

Specialty Capital continues to keep its fingers on the pulse from a micro perspective and believes that while the economy is cooling down, there will be opportunities for the right merchants. We have the view that services will remain strong and the consumer will pare back spending on higher-priced goods. We are staying constructive and remaining creative in our underwriting.

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