With the Dow hitting another record, inflation has just hit an 11-year high, plus other surprises.

Inflation Hits 11 Year High
July 12 (King World News) – 
Peter Boockvar:  I’m going to say again how maddening it is to hear the Fed and Jay Powell over the past two days whine about inflation missing their 2% target because that is only because they look at one measure, core PCE. Did you see yesterday’s Cleveland Fed’s CPI number? For June it rose to 2.84%, matching the highest level since November 2008. So yes, a nearly 11 yr high in this inflation metric and the Fed is saying that low inflation is a reason to cut. I agree that slower economic growth is a legit reason but to blame inflation…Oh, if you don’t like the Cleveland number, then did you see the Atlanta Fed inflation numbers yesterday? Sticky CPI jumped to 3.02% y/o/y vs 2.3% in May, while the core rate was 2.9% vs 2.2% in May.

What were the main reasons for this rise in inflation according to the Cleveland Fed? Similar to the main CPI number it was in part to used cars/trucks, footwear, apparel, household furnishings, rent, medical care and insurance…

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China M2 Grows 8.5% In June
Shifting to China, exports in June fell 1.3% y/o/y as expected but imports fell 7.3%, more than the estimate of a 4.6% decline. Many imports eventually end up in exports. Remember that the new batch of tariffs went into place in May so that had to be digested but then it wasn’t until the end of June before we realized that a new round of tariffs would not be implemented, for now. How much influenced the data is impossible to say but generally speaking it’s pretty clear what the impact has been of tariffs on global trade.

Also, China said that aggregate financing in June totaled 2.26T, well more than the forecast of 1.9T with all of the upside being from non bank finance. Bank loan growth actually was a bit light relative expectations making up 1.66T of the 2.26T vs the estimate of 1.7T. Money supply growth, as measured by M2, was as expected at 8.5%, the same pace as in May. Mortgage debt and corporate loans saw the notable increases from May. Also, local government bond issuance was a likely contributor to the non bank numbers.

Bottom line, China continues to balance the headwinds of slower trade, major debt imbalances, the inconsistent pace of small and medium sized businesses accessing credit, the desire not to inflate further credit bubbles all while growth was slowing anyway. The stock market response was mixed to the data as the Shanghai comp was up by .4% but the H share index in Hong Kong was unchanged.

European Rates
In Europe, industrial production for May jumped .9% m/o/m, better than the estimate of up .2%, a pleasant surprise but again, who knows how much was activity being pulled forward with the new tariffs in May between the US and China and how much activity was rushed. Regardless of why, European bonds are selling off again with the German 10 yr yield rising for a 4th straight day and by 16 bps on a closing basis to -.20%. The French 10 yr is back above zero.

The US 10 yr in sympathy is little changed but that’s because it had already spiked at the end of yesterday after the crappy 30 yr auction and the rise in CPI. Its yield is up 18 bps over the past 7 days. So, the Fed wants to cut 25 bps but for those wanting to buy a home (they are) seeing almost a 25 bps increase in the mortgage rate over the past week and change. The market will speak for itself on what it thinks the Fed is doing with short rates. The Fed better not forget that.

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