Current position: Continue Floating
CPI (Consumer Price Index)
The November Consumer Price Index (CPI) report showed that overall inflation increased by 0.1%, which was 0.2% below expectations. Year over year, inflation declined from 7.7% to 7.1%, which was much cooler than the 7.3% expected.
The real story here is the Core rate, which strips out food and energy prices. It increased by 0.2%, which was softer than the 0.3% anticipated. As a result, year-over-year core inflation decreased from 6.3% to 6.0%, which was also lower than the 6.1% expected. We said in yesterday's update that we thought core inflation could move lower than expectations to 6% because in the previous report there was a big 4.9% rise in lodging away from home, which was an outlier, and we thought it came back to earth in today's report. It did indeed fall 0.7% in today's report helping inflation.
Shelter rose by 0.6% and is now up 7.1% year over year, which is an increase from the previous 6.9%. Rents rose 0.8% last month and are now up 7.9% year over year, which is up from 7.7%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.7% and is up 7.1% year over year, up from 6.9%. While the CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down. Because shelter makes up 39% of Core CPI, it was the main cause of the 0.2% monthly gain... but imagine when this catches up and starts to add deflationary pressure.
Looking at more of the internals - Energy prices fell 1.6% from a month ago, bringing the annual gain to 13.1%. Gasoline prices fell 2% and are up 10.1% year over year.
Food prices, which make up 14% of the CPI, climbed 0.5% in November, bringing the year-over-year gain to 10.6%. Medical care costs fell 0.5% last month and are up 4.2% year over year.
Our good friend, Peter Boockvar, pointed out that Health insurance for a 2nd month, for reasons stated last month and mentioned again this morning, was a key factor in this as prices here fell 4.3% m/o/m. That is a quirk in how this piece is calculated. Up until last month, it was overstated to the upside and now is being overstated to the downside.
Auctions
Yesterday's 10 - year Note Auction was very weak. Demand was weak and direct and indirect bidders took half the auction, leaving dealers with the balance, which is the 3rd most since July 2022. Traders were dead wrong for the second month in a row, and likely wish they got in when 10 - year yields were 15bp higher yesterday.
Later this afternoon at 1:00 pm ET there will be a 30 - year Bond Auction, which could create another tailwind if there is strong demand.
Small Business Optimism Index
The NFIB November small business optimism rose slightly but is still well below the norm. The labor market responses all weakened. The compensation figures, both current and planned, each fell, and the inflation problem eased a bit. The NFIB said, "Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high".
Tomorrow's Fed Statement & Press Conference
We know the Fed is still going to hike 50bp tomorrow, but after the second lower core CPI print, lower PCE reading, and lower producer inflation readings, it will be interesting to see if the Fed sounds less hawkish and if they acknowledge that the improvement in inflation. Of course, they are going to continue to say there is a lot of work to be done to get to their target and they need to keep the fed funds rate elevated to make sure to quell inflation, but if they sound less hawkish it could spark another rally.
There is always the risk that Powell will ruin the party, but now the futures market is pricing in a 25bp hike, instead of 50bp, at the February 1 meeting.
Technical Analysis
Mortgage Bonds have busted through the 100 - day Moving Average and are taking another run at the 101.688 ceiling, which is the high from December 2. The 10 - year has made a big move lower, breaking beneath the 100 - day Moving Average and now trading at 3.45%. The next stop is 3.40%, which is a very important floor of support - If that level is broken, yields could go all the way down to 3.10%. Continue Floating.