Inflation slowed in October

October’s #CPI printed below expectations for both core and headline inflation, returning to the cooler inflation trend we saw over the summer. Core CPI, which excludes the volatile food and energy components of inflation, grew +4.0% YoY, lower than September. When looking at price changes over the month, inflation grew +0.2% MoM, also slower than the previous print. October services inflation was weighed down by slower shelter prices inflation, mainly strong deflationary price movements in lodging away from home. This print was encouraging because it shows core inflation returning to the trend of sustained ~0.2-0.3% month-over-month price growth. The rates market rallied meaningfully in response, with the ‘belly’ of the curve leading the way – 5 year Treasury yields dropped as much as 0.25%! Stocks also liked the weaker data. The S&P 500 rose 1.92% after riskier stocks led the way. What does this mean for the Fed? We believe this print reconfirms our view that the Fed will be firmly hold rates at the FOMC meeting in December and that their last hike of the cycle was back in July. Source: BLS, Bloomberg, as of November 14, 2023. S&P 500 represented by S&P 500 index (SPX Index); 5-year Treasuries represented by US Generic Govt 5 Yr Index (USGG5YR Index).

The inflation data just released will cement the belief of markets that the hiking cycle is over. Month-over-month core CPI came in at 0.2%, so we are trading toward a 2.5-3% core for next year. Not a bad outcome for the Federal Reserve Board Since April 2023, the US economy has been observing a slowdown, with the unemployment rate rising from 3.4% to 3.9%. To assess the pace of this slowdown, it will be essential to monitor the following two to three unemployment readings. This will help in gaining insights into the overall health of the economy. In any case, the market narrative has changed, and less importance is given to Inflation and more importance to the unemployment rate. I have already seen some articles again bringing up rate cuts for next year. One data point that might allow the Fed to cut rates next year is the evolution of the 5Y - 5Y Forward Inflation Rate. As you can see from the chart below, this indicator has started to soften again since August, and it is pointing toward 2.3%, which is only slightly away from the Fed Target. I think the return distribution for bonds going into next year is more balanced than 2023, especially if the 10-year yield moves back up to 5%. I think that if the 10Y breaches again 5%, it might be an excellent point to add duration to protect portfolios from a potential steep slowdown in the economy, but I advise my followers that the protection might be limited; I do not expect the 10Y to move below 3% if the recession is mild. If your Bond Portfolio has a duration of seven years, for instance, you are looking at a 10% capital gain (ignoring convexity) plus the coupon return, so let's call it 14%. This is still a good cushion in case of a steep decline in stock prices, especially if you pair it with some exposure to Gold, which might rally above 2,000 $/Oz. Your 👍 and comments mean a lot to me as they help me improve my content and provide you with a better experience. Don't hesitate to share your thoughts with me below. #TheQuantGuy

Good News in October Inflation Numbers But underlying factors still warrant caution. Consumer prices held steady in October, following a 0.4% increase in September. As expected, falling energy prices were the primary negative factor, falling by 0.2% on the month; non-energy goods prices edged down slightly. This was offset by modest increases in shelter costs and other non-energy services, both up 0.1%. Month-to-month inflation has declined for the past two months, falling from 0.6% in August to 0.4% last month to 0.045% (rounding to 0) in October. It would be churlish to ignore this recent good news, and by and large it does get us further on the way to price stability. Year-over-year inflation is now running at just 3.2%, down from 5% as recently as April. "Supercore" inflation, which excludes food, energy, and shelter is running at about 2%. But there continues to be too much momentum in core service areas that Fed Chair Jerome Powell sees as important drivers of sustainable long-term inflation. Non-energy services other than shelter eased slightly in October, but they are running at 5.5% on a three-month trailing average basis. Because month-to-month data is so volatile, we don't want to give excessive weight to movements in a single month. Take a look at the graph of contributions to one-month inflation if you have any doubts about that. Shelter costs also pulled back in October, but remain high on a three-month basis. Shelter prices will eventually ease further as rents—and rent-based measures of homeowner shelter costs—feed through, but this is taking a long time. The Fed is committed to achieving 2% inflation over the long run, based on the alternative PCE measure of inflation. CPI inflation tends to run higher than PCE inflation over time, so that may mean getting CPI inflation down to a 2.5% trend. This October CPI data is encouraging in this regard, but also shows that key elements remain stubbornly high. That makes the PCE data coming up on Nov. 30 particularly important for the FOMC meeting December 12-13. But barring surprises there, the chance of a continued hold on additional rate hikes seems large. In fact there is now increasing speculation about when the first Fed rate cut might come. That will depend on measured inflation, inflation in key service areas, and developments in labor markets, spending, and economic growth. It seems premature to be guessing at when such a rate cut might come. And that's all it would be at this point. #CPI #inflation #shelter #serviceinflation #federalreserve #jeromepowell

Despite cooler inflation, we’re not forecasting lower interest rates — yet   October 2023 may have been 2°F warmer than average in the U.S., but #inflation for the month was cooler than it’s been since July 2022. That’s according to this morning’s release of Consumer Price Index (CPI) data showing a broad-based dip in the inflation rate, including welcome progress in slowing key components of services costs such as shelter.    The below-consensus print for headline #CPI showed a zero increase for the month of October and +3.2% year-over-year. Core CPI, which excludes food and #energy prices, also came in lower than anticipated, at +0.2% for the month and +4.0% year-over-year.   Not surprisingly, the news cheered both equity and fixed income #markets this morning. But with core annual inflation still two full percentage points above the Fed’s 2% target, policymakers will remain data-dependent. Until they’re convinced October’s cool breeze has evolved into a truly sustainable weather pattern, we expect higher-for-longer monetary policy to persist, with rates remaining elevated and no cuts likely until the second half of 2024.   Do you think today’s CPI print means we’ve seen the last of Fed rate hikes for this cycle?   #LITrendingtopics

🚨#Inflation glides back down in October. The 10Yr yield and #mortgage rates fell the news. The bulk of the past year’s disinflation story came from easing supply issues. Going forward, demand will have to moderate further. The good news is the #consumer is back on track after a summer #spending binge. Prices of used cars, hotels and airline fares are moving lower. ➡️ Headline consumer #prices did not increase in October. Core #CPI made a small advance at 0.2% down from 0.3% last month. On an annual basis, headline inflation slowed to 3.2% from 3.7% last month. Core inflation slowed to 4% from 4.1% a month ago. ➡️ The shelter index increased 0.3% in October down from the 0.6% advance in September. This is in part due to a big decline in the lodging away from home index. 💥 This report provides some hope for the “immaculate disinflation” story. Only so long as #fiscal policy and dysfunction in the nation’s capital do not throw a wrench into the spokes of the economy’s turning wheel. ✅ Fed is done and the #bond market is in the driver seat. Wells Fargo Chief Economist Tendayi Kapfidze correctly argues #federalreserve speakers will have to continue to sound hawkish. Consumer lending is very sensitive to changes in longer term #yields - look no further than mortgage rates. A large drop in yields could re-ignite the consumer. Here’s the full interview on Yahoo Finance

Now comes the hard part. Today’s CPI report was good news on the pace of disinflation, especially since inflation slowed more than the market expected. As I’m writing this, the S&P 500 is up over 1.9%, and bonds have rallied sharply, on the expectation that the Federal Reserve is done. And, indeed, they may be done. However, here are some thoughts from my colleague Chris Faulkner-MacDonagh, Portfolio Manager: “The easy gains have been made. Only three times did core inflation fall by 100bp from this point of the inflation cycle: March 1980, May 2001, and July 2008. To get that disinflation, each time, we had to have a recession. In the “soft landings” of January 1986 and January 1997, core inflation barely budged.” We continue to like inflation sensitive assets. Even as risk rallies, we could find that we need to live with higher inflation for longer. #assetallocation #inflation As of: 11/14/2023. Source: T. Rowe Price analysis with data from Haver Analytics and the Bureau of Labor Statistics. All Right Reserved. This material is being furnished for general informational purposes only. This material does not constitute investment advice.

October CPI Update Today's Consumer Price Index release will be welcome news to Fed watchers. September's spike currently looks more like a one-off than a trend reversal. Inflation in the two most closely watched components, core services and housing, appears to remain on a downward path even though they are much higher than the Fed would like them to be (around 3.7% annualized). Transportation service inflation continues to run very hot (10% annualized), but that does not appear to putting a dent in demand for air travel (at least at SFO). #inflation #cpi

There’s no doubt about it: October’s #inflation print is good news. An intact disinflationary process means that the Fed can sit tight for now and reduce the risk of overly restrictive policy. We’d caution investors before getting too enthusiastic. Financial conditions are now easing again, which keeps the #Fed on guard and highly data dependent. October’s inflation print was marginally better than expected, but the last few have been worse than expected, putting us right on par with what the FOMC penciled in for inflation end-of-year. And for the real #economy, price levels are still incredibly challenging for consumers. There is a real dissonance between lower price growth and still-high price levels that are pinching. For inflation to move sustainably lower, you need to see the #unemployment rate move higher. A white-hot labor market means that consumers can continue spending at high price levels, which begets more inflation. To break the cycle, a higher unemployment rate and recession are likely required. The good news for #investors is that recession isn’t here yet. In past economic cycles, markets don’t tend to price in recession until jobless claims are rising and earnings are in outright decline, signs that recession has already arrived. As a result, investors can use moments of #market uplift to rebalance their portfolios to the themes that they expect to be more durable.

It's all about CPI today. Headline CPI is down to 3.2%, and Core CPI (excluding food & energy) came in at 4.0%. This is excellent news folks. The inflation dragon has been slain. As Whitey Ashburn used to say to Harry Kalas, "Hard to believe it, Harry." This may be a hint as to why the stock market has improved over the last week. And here's the kicker: the one thing holding up Core CPI is the "Shelter Index" which is this complex amalgam of home ownership and rent cost. It's about 37% of Core CPI and it's still at 6.7% YoY increase. But there are two things to remember. 1 - Shelter index is calculated as a kind of moving average, with a 9-12 month delay in the calculation. They do this to smooth out the rough edges of the index both seasonally (i.e. spring sell season, winter slow sales, etc) and monthly. 2 - Rent indexes are plummeting. The National Rent Index calculated by Apartment List shows rents actually decreased -1.2% YoY as of October. So it's only a matter of time when the shelter index normalizes and we see CPI and Core CPI down into the low-3's or even high 2's. This is really good news, as far as I'm concerned. It shows that Fed policy is working, and not a moment too soon. I've read that $8 trillion+ of our national debt will be refinanced in the next year. That means debt with coupons in the 2's would be re-fi'd into the 5's, putting our federal government on further course for unsustainable deficits. One would hope that, given this data and the upcoming rollover of shorter-term national debt into higher rates, the Fed can reduce rates next year. We will see. Should be interesting that's for sure. #fedpolicy #interestrates #riskmanagement

🧊THE OCTOBER CPI REPORT🧊 🧊Inflation slowed down again ⛽ Gas prices are working in your wallet's favor again 😖Services inflation is...picking up again? ⛰ The trend is clear(ish), a good sign if you're worried about rates Inflation is slowing because supply and demand are coming back into balance, and you can see that theme woven throughout today's CPI report. ⛽ Higher oil prices stalled inflation’s progress over the past few months, but it was a temporary spike that’s now working in your wallet’s favor 🥕 We’re also seeing continued progress in food and shelter prices 🤑 Wages have now grown faster than prices year-over-year for a fourth straight month. All in all, this report is another good step for the average American. The economy is healing, even if it's not completely obvious yet. One detail that’s giving me pause is the sudden uptick in services inflation (excluding rent). This is the measure that Jay Powell likes to point out, and it actually accelerated on a year-over-year basis in October. This would be the Fed’s main argument for keeping rates higher for longer, but it’s just one data point in a sea of context that says otherwise. If you think a recession is ahead, watch the job market and focus on companies that you think are durable enough to survive. Stocks may have an argument to push higher if the economy stays afloat, too, so don’t give up on the market completely. It's a bull market until proven otherwise.