US inflation cools

This is an audio transcript of the FT News Briefing podcast episode: ‘US inflation cools’

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Marc Filippino
Good morning from the Financial Times. Today is Thursday, July 13th. This is your FT News Briefing.

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Inflation has hit its lowest level in more than two years and people are moving away from junk bonds. Plus, Nato wrapped up its summit yesterday and things got a little snippy.

John Paul Rathbone
This is not to say that western support for Ukraine is flagging. That would be the wrong idea. But it . . . everyone is getting tired.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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The latest US inflation numbers came out yesterday. The consumer price index fell to 3 per cent in June, which is a full per cent lower than it was in May. The cooler inflation report caused the S&P 500 to jump and Treasury yields to drop. I’m joined now by the FT’s US economics editor Colby Smith to talk more about the ins and outs of the report. Hey, Colby.

Colby Smith
Hi, Marc.

Marc Filippino
On the surface, it would seem like we got an encouraging inflation report yesterday. How would you describe it?

Colby Smith
I think both on the surface and when you look beneath the hood, this is a good inflation report. And speaking to various economists, it was tough to find points of concern in this reading. I think the big question, though, is whether this is the start, you know, of a string of more subdued inflation prints or if this is perhaps just a one-off and not necessarily a sign that the inflation problem is fully behind us.

Marc Filippino
Was there a lot of concern over the strength of core inflation, inflation that strips out things that are more volatile like food prices and energy prices?

Colby Smith
Yeah, core inflation has always been what policymakers and economists have focused most directly on, just because that’s seen as the best kind of indicator of where inflation is going from here on out. That’s still relatively high when you think about the annual pace. But if you look at the monthly gain in particular, it was only 0.2 per cent in June, and that’s the smallest increase in nearly two years. And in speaking to an economist about the kind of trend going forward, the expectation is that not only for June but for July, August and September, we can expect core inflation to steady at that level.

Marc Filippino
So Colby, do we have a sense of how this report could affect the way the Federal Reserve approaches interest rates?

Colby Smith
So that’s really the big question that I think economists are grappling with. We know that a July interest rate increase, you know, at their meeting at the end of the month is quite likely. I think the big question now is what happens after that point. There’s a lot of speculation that the Fed could very well be done with the tightening cycle. It’s squeezed the economy sufficiently to get inflation back down to 2 per cent, and it doesn’t need to do anything further. Regardless of where the Fed shakes out, we’re likely to see them keep the door open to further interest rate increases at the next meeting just because they don’t want to tie their hands.

Marc Filippino
Colby Smith is the FT’s US economics editor. Thanks, Colby.

Colby Smith
Thanks, Marc.

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Marc Filippino
The US junk bond market is shrinking. This is some of the worst-rated credit out there. And the high-yield market is now worth $1.4tn. Now, that may sound like a lot, but that’s a 13 per cent contraction from its high mark in 2021. Harriet Clarfelt covers credit for the FT. She says there are a few reasons why the junk bond supply is significantly smaller now.

Harriet Clarfelt
So if you go back to the beginning of the Covid crisis in 2020, as we know, the Federal Reserve slashed interest rates close to zero. And one of the things that happened because of that is companies issued lots of debt because it was very cheap to do so that borrowing costs were very low. And now here we are and interest rates in the US are above 5 per cent. And it’s just much less attractive for companies to borrow at those levels, particularly if they’re risky companies which tend to have to pay quite a lot more than, say, government. The government has to pay on its bonds. So on the one hand, we’ve had relatively less new issuance this year. We’ve also had quite a lot of companies get upgraded to what we call investment-grade status in the bond markets so they’re no longer in the junk bond market. People are also saying that private credit, which is a relatively new market, has been stealing some share away from the high-yield bond market.

Marc Filippino
Harriet says the junk bond market is still a huge one, but we should care that it’s shrinking.

Harriet Clarfelt
There’s an argument that with the sort of shrinkage or contraction of the junk bond market, there’s just less stuff out there for investors to buy. And that’s keeping prices in the market anchored at levels that could give full signals about the state of the US economy. But it could also mean that there’s further to fall for some companies in their bonds if we do suddenly get much more negative data about the sort of health of the economy, the economic outlook. This has been a mainstay of corporate borrowers for decades, this market. It’s where lots of lowly rated US companies go to finance themselves. But because of that, it’s also been used as one indicator of the sort of health of the US economy and the outlook for the economy.

Marc Filippino
Harriet Clarfelt covers credit for the FT.

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Nato finished up its two-day summit in Lithuania yesterday and it was anything but dull. The meeting ended with some tense words between Ukrainian president Volodymyr Zelenskyy and a high-ranking UK official. To recap what happened, I’m joined by the FT’s defence and security correspondent John Paul Rathbone, who’s in Lithuania. Hi, JP.

John Paul Rathbone
Hi.

Marc Filippino
All right. So you’re at the Nato summit as it’s wrapping up. What are some of the biggest points that you can take away from this Nato summit? Obviously, there’s been a ton going on.

John Paul Rathbone
There has indeed, has been a ton going on. And for one, Turkey approved Sweden’s entry to the defence alliance. The group has also agreed a bunch of reforms that will almost increase the number of troops available to Nato by 10 times. So these will be rapidly deployable troops that can be moved anywhere at short notice. That will be 300,000 troops. Then there is also the Ukraine issue, which has been the most emotive.

Marc Filippino
Obviously, that was one that a lot of people were watching going into this summit. What came out of it?

John Paul Rathbone
The key issue has been the way that Nato will invite — or not — Ukraine into the alliance and was, everyone, including Kyiv, recognises that the country can’t become a member of Nato while there’s a war going on. They were hoping for a firm invitation, a clear deadline, a clear timeline to when that would happen, and instead it got kind of wilfully, woefully language. The Nato communique, which has to be agreed by everyone, said that Nato will invite Ukraine to join when its members agreed and certain conditions had been met.

Marc Filippino
Now, JP, I want to highlight something that happened at the end of the summit when Zelenskyy blasted Nato’s plan because it didn’t carve out a clear timeline. And then the UK’s defence secretary said, in reference to Ukraine’s military wish list, “We’re not Amazon”. That was a quote. And basically he’s saying we’re not a retail operation and please show us some gratitude. JP, seeing this tension out in the open, you know, what do you make of that?

John Paul Rathbone
So I think this reflects that we’re over 500 days into the war and it’s becoming a tough grind. The counteroffensive in Ukraine is stuttering against the Russian forces. The west is running out of ammunition stocks. The west has been . . . has ploughed in like $170bn of military and financial aid into Ukraine. This is not to say that western support for Ukraine is flagging. That would be the wrong idea. But it . . . everyone is getting tired.

Marc Filippino
JP Rathbone is the FT’s security and defence correspondent. Thanks, JP.

John Paul Rathbone
Thanks, Marc.

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Marc Filippino
Before we go, Disney is keeping Bob Iger on as CEO for a while. Iger has agreed to stay in the role ‘til the end of 2026. The entertainment group says this will give him more time to find his replacement. Now, you might remember that this is Iger’s second stint as the head of Disney. He served as chief executive from 2005 to 2020 before Bob Chapek’s brief and rocky tenure. Iger then reclaimed his CEO title last autumn.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.