Warm Inflation Prints and a “Golden Cross” — Evening Brief – 12.12.24
The approximately 20-basis point backup in the U.S. 10-year Treasury yield to 4.31% over the past five trading days is likely a reaction to heightened speculation regarding future inflation trends and uncertainty surrounding potential economic policy changes that the Trump administration may enact.
On Thursday, we were greeted with a slightly warmer headline Producer Price Index (PPI), which increased by 0.4% in November, above the consensus forecast of 0.3% and accelerating from the revised October figure of 0.3%, previously reported as 0.2%. This resulted in a 3.0% annualized gain, in contrast to the 2.6% consensus and +2.9% from the previous month. The October figure was adjusted upward from +2.4%, as per data published by the Bureau of Labor Statistics.
Core PPI, which excludes food and energy costs, increased by 0.2% in November, a deceleration from 0.3% in October, in line with the consensus estimate. On an annual basis, core PPI rose 3.4%, still warmer than the +3.2% consensus, and unchanged from the previous month, which was revised from +3.1%.
Meanwhile, on Wednesday we saw the U.S Consumer Price Index (CPI) pick up in November, rising to 2.7% year-over-year while core CPI held steady at 3.3%
While the Fed focuses more on CPI and its components than PPI, both metrics are stubbornly higher than the Federal Reserve’s 2% target, raising fears that progress in containing inflation has stagnated.
The move higher in the U.S. 10-year yield, after declining throughout November, is likely jitters about the return of inflation. Some analysts believe that Trump’s proposals to raise tariffs, cut regulations to boost economic activity, and deport millions of immigrant workers will accelerate inflation. On that basis, the bond market may respond by demanding more yield compensation.
Some strategists, however, believe we are still on a disinflationary path. “The November CPI report was another mixed bag, but it did little to alter the prevailing narrative of a slow and broad-based disinflation process,” Bryan Jordan, Cycle Framework Insights, Inc chief strategist, shared in an email with Connect.
“The easing in the rent component, especially, is an encouraging sign for the months ahead; OER has accounted for more than half of the rise in core prices since the outset of 2023,” he said.
Although reflation poses an increasing risk, it is not anticipated to impede the Federal Reserve’s intentions to further reduce interest rates at next week’s policy meeting. Fed funds futures are pricing in a near-certainty that the central bank will cut its target rate by a quarter point next Wednesday.
On the basis, conditions don’t appear ripe in the near term for a resumption of the November downtrend in government bond yields unless future inflation data reveals a renewed decline and/or economic growth weakens.
From a technical perspective, there is also evidence that yields may be headed higher. Last Friday, the U.S. 10-year yield triggered a “Golden Cross,” a bullish chart pattern where a short-term moving average (typically the 50-day) crosses a long-term moving average (also typically the 200-day) from below. The odds of the indicator being correct are if the 200-day moving average is rising, which is currently the case.
At this point, with the downtrend in inflation appearing to be stalling, consensus growth forecasts for the fourth quarter relatively strong (the Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter is 3.3 % as of Monday), and a bullish technical pattern, the path for yields may be higher from here.