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Continuing the conversation though around this July CPI print. We've got Nathan Sheets, he's the global chief economist at City, plus Nicholas Brooks, who's the head of economics and investment research at ICG. Thank you both for taking the time here with us today. Uh, look, I just want to get a reaction here, Nathan, I'll go to you first. I mean, I'm looking at the fourth stanza in this CPI for July 2024, and it says the all items index rose 2.9% for the 12 months ending July, the smallest 12 month increase since March of 2021. What do you make of this?

I think this is a report that one is very much in line with expectations, two is consistent with the Fed's expectations for ongoing disinflation of the US economy, and three, if I'm J Powell and I'm thinking about the components of inflation, the part of the inflation process that I know has been the most stubborn, but is also the one that is likely to be coming down with the greatest confidence is the shelter component. So if, I'm going to have the preponderance of the rise in the shelter piece, that's good news for me that it's not in the non-shelter services part that's been so stubborn and is linked to tight labor markets and wages. I think this report is a green light for the Federal Reserve in September.

Nicholas, what do you think? Do you agree?

Yeah, I completely agree. And, um, you know, I think this was a very good report. And I'd say one of the key factors that I've been looking at, um, is the core services ex shelter. And what's interesting in your own your terms in any case, um, that's also started to come down, um, pretty quickly. So that came in around 4.2% year on year from 4.6% in June. And that personally was what I was really looking at because, um, you know, to the degree that that was holding up, you know, close to 5%, I think it was going to make it harder for the Fed to cut aggressively. But if this number keeps coming down that core services ex shelter, uh, that's certainly a good sign for the Fed.

Just to follow up on that, I mean, what is the pacing of cuts that you would anticipate if we continue to see this print trend in this direction?

Well, from my perspective, I'm probably less aggressive than, um, futures are now pricing. Um, I think that, you know, growth data is still pretty robust. And we did see that very weak payrolls number, um, and we have seen some data indicating slower growth. But if you look at, you know, the general GDP trend, if you look at the PMIs, if you look at a lot of the key lead indexes, growth I think is slowing, um, but I don't think it's slowing so sharply that the Fed needs to move 100 basis points, um, over the next few months. I do think that the trend is downward for interest rates in the US, and I think that we are at the beginning of a long cutting cycle. Um, but I do think that perhaps markets have overegged it a little bit as they did earlier this year. Um, as I think the growth data actually is still pretty decent.

Nathan, what do you think this does to the 25 versus 50 basis point debate? Because I'm taking a look at the CME Fed fund futures, it looks like traders pairing some of their bets here that we are going to get a 50 basis point cut here next month. Do you, is 50 still likely in your view or what do you think the Fed is likely to do?

I think going into this report, it was a close call for the Fed between 25 and 50. On the other side of this report, now that we have it in hand, it's still a very close call. I don't think this appreciably moves the needle much one way or another in that debate. Now, that said, I am also going to be watching very closely the economic data that we got tomorrow and specifically that retail sales report and what it's telling us about the US consumer. I think if anything, that one may be more important. There was less uncertainty about this print, and I think more uncertainty about where we're going to see the consumer and consumer spending in that retail sales number tomorrow.

You know, Nathan, it's interesting and I think you mentioned housing earlier as well. Just want to follow up on that because that is still accounting for 90% of the increase that we'd seen in this most recent month. The Fed is essentially balancing a chemical equation here. If they try to bring down and continue to bring down inflation, but also make sure that they are doing what they can to bring down housing inflation, the core piece of that, what's to say that consumers won't look at rate cuts and say, okay, now we're getting the all clear to go out and spend willy-nilly once again, uh, and then that risking ratcheting up inflation again?

Well, I think the good news regarding shelter inflation is that we know that those indexes for rents and house prices have moderated, and that has not yet passed through fully in the CPI. And I think that's why the Fed is comfortable that we're going to see further improvements there over time. Now as the Fed starts to cut, the goal is to stimulate the economy, but to stimulate the economy in an incremental fashion that helps support the consumer but doesn't put us back into those dynamics where the economy's too hot. So I think it's an incremental kind of stimulus that as they cut will provide support, but it won't reverse the success that they've had in bringing down inflation.