Overall inflation came in flat in July mainly due to lower gasoline prices.  Other items continued to rise and it is likely that overall inflation will stay well above the Fed’s 2% target for some time.  Major stock indices rallied sharply on the news.

The House passed the named “Inflation Reduction Act” on a solely partisan basis and sent it on for President Biden’s signature.  Under the reconciliation rules, the Senate was able to pass this budget bill with only a simple majority as long as it lowers the deficit over a 10 year period.  The bipartisan Congressional Budget Office had estimated bill includes spending of $433BN and raises revenue by $739BN.  The spending is largely on clean energy subsidies over the next decade.  Also included is a three year extension of healthcare subsidies and increased IRS tax enforcement.  It also authorizes Medicare to negotiate some prescription drug prices and will cap the cost of insulin for Medicare recipients.  The revenue is raised by a 15% corporate minimum tax and a 1% levy on stock buybacks.  It should be noted that the corporate minimum tax was agreed to by 130 countries including the U.S.  While raising taxes can hurt growth, the implementation of the corporate minimum tax globally will prevent tax havens from luring U.S. corporations to relocate.  The $739BN bill was much smaller than the original $3.5TN Build Back Better bill floated last year.  Any reduction of inflation will be minor and will happen over time.

Productivity fell for the first two quarters of 2022.  Drops in productivity typically occur during periods of hiring, with new hires in training and less productive, and also during periods of economic contraction.  Both of these conditions are occurring now and falling productivity contributes to inflation.

Mexico raised it’s key interest rate 0.75% to 8.5%.

The 30-year bond yield rose to 3.11% and the 10-Year note was unchanged at 2.842%.  30 year mortgage rates ended at 5.22%.  U.S. crude oil rose to $91.90 a barrel and natural gas rose to $8.772 per MMBTUs.  The U.S. dollar index fell to 105.69.  Gold rose to $1817 an ounce.

In the economic numbers:

• China’s National Bureau of Statistics reported:
  • Consumer prices were up 2.7% in July from a year earlier mainly due to a 20.2% rise in pork prices.
  • Producer prices rose 4.2% year over year in July, down from 6.1% in June.
• The Treasury Department reported that the federal deficit fell 30% in July from last July.
  • Government spending fell due to the end of pandemic relief.
  • Revenue rose due to more people working.
  • The nonpartisan Congressional Budget Office projects that the deficit for the fiscal year ending September 30^th will be $1TN, down from $2.8TN the prior fiscal year.
• The National Association of Realtors reported:
  • The median single-family existing home price rose to $413,500 in the second quarter, up 14.2% from a year ago.
  • The housing affordability index, which looks at the total cost of a median home relative to household income, hit it’s lowest level since 1989 in June.
• The Labor Department reported:
  • Seasonally adjusted non-farm labor productivity fell at an annual rate of 4.6% in the second quarter. 
  • Average hourly earnings in July were 5.2% above a year ago.
  • The consumer-price index was unchanged in the month of July down from a 1.3% increase in the month of June.
    • The index was still up 8.5% from a year ago, down from 9.1% year over year in June.
    • The decrease was mainly due to a drop in gasoline prices which fell 7.7%.
    • Food prices rose 1.1%.
    • All items excluding volatile food and energy rose 0.3%, lower than in each of the previous three months.

Source: U.S. Department of Labor

• • Wholesale prices fell 0.5% in July.  However, from a year ago, wholesale prices have risen 9.8%. This is down from 11.2% year over year increase in June and 11.6% in March.
  • Seasonally adjusted first time claims for unemployment rose to 262,000, up from a revised 248,000 in the prior week. 
    • The 4-week moving average of claims, designed to smooth out volatility, rose to 252,000 from a revised 247,750.
    • For the full unemployment report go here:  https://www.dol.gov/ui/data.pdf .
• The EIA weekly oil report is here: http://ir.eia.gov/wpsr/wpsrsummary.pdf .  Also, the EIA reported in the prior week:
  • Field production of crude oil rose from 12.1MM BPD 12.2MM BPD.
  • Natural gas storage rose 44BN cubic feet and is below the 5-year average at this time of year.
• Baker Hughes reported the number of active oil rigs rose 3 to 601.  The number of active natural gas rigs fell 1 to 160.
• Factset reported that the blended earnings increase is 6.7%.  However, energy stocks have posted a 299% gain in earnings.  Excluding energy, the S&P 500 earnings reported so far have declined 3.7%.

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  Loren C. Rex, CFP^®, MA                                                                     Erik A Smith, AIF®

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   These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.  The Indices mentioned are unmanaged and cannot be invested into directly.