Evening Brief – 11.14.23
The Fed Just Got Tighter
After two months of stronger-than-anticipated inflation prints (due to rising energy prices), the October CPI data was predicted to decline significantly from the previous month (from 3.7% to 3.3% on the headline number), while core CPI was expected to remain unchanged at 4.1%. Instead, CPI was lower across most categories with both headline and core prints coming in lower than expected on both a sequential and yearly basis.
The October annual CPI was 3.2%, lower than the 3.3% projected, while the month-over-month CPI was unchanged, also missing forecasts. This was lower than the 0.1% consensus and far lower than the 0.4% reported last month.
On core CPI, a similar result developed. The month-over-month change in October was 0.2%, which was lower than the 0.3% consensus projection and lower than the 0.3% gain in September. The annual figure fell to 4% from 4.1%, missing estimates of unchanged and the lowest since September 2021.
According to the BLS, the shelter index continued to rise in October, offsetting a fall in the gasoline index and leaving the seasonally adjusted index unchanged for the month. Over the month, the energy index decreased 2.5% as a 5% drop in the gasoline index more than offset improvements in other energy component indices. The food index gained 0.3% in October, following a 0.2% increase in September.
Rents and housing prices have already reached their peak, so we know where shelter inflation is headed. The only concern now is what will happen to other prices, such as gas, going forward.
Looking at the contributions to yearly CPI, it’s evident that core goods inflation has all but vanished as energy helped pull headline CPI lower in October, with the only sticky inflation remaining firmly established in services, most notably housing.
On a sequential basis, the BLS noted that core goods inflation has been negative for the past five months, with energy helping drag down the headline print to unchanged, as energy detracted 0.176% from the bottom-line number.
The CPI data, which was only supported by shelter inflation, which is 12 months behind and should be 0%, and a post on X by Federal Reserve whisperer Nick Timiraos enhanced the likelihood that the central bank has completed its monetary tightening campaign.
“The October payroll report and inflation report strongly suggest the Fed’s last rate rise was in July. The big debate at the next Fed meeting is shaping up to be over whether and how to modify the post meeting statement to reflect the obvious: the central bank is on hold,” posted Timiraos.
The financial markets clearly embraced the weaker-than-expected CPI data, sending the equity markets sharply higher, with the S&P 500 up 1.9% and the Nasdaq up 2.3%.
As stocks rallied, U.S. Treasury yields collapsed, with the U.S. 10-year yield now well below 4.50%. The long- and front-end of the curve led gains, with the U.S. 2-year yield declining 20 basis points, while the U.S. 5s30s yield spread steepened by around 5 basis points.
As a result of today’s decline in inflation and a Fed on hold, monetary policy just got tighter. As for forecasts on the Federal funds rate: a 99% chance of no hike in December. Interestingly, however, the market is pricing in over 100 basis points of easing next year compared with the Fed’s forecast (from the September projections) of just below 30 basis points.