A Good Day for The Fed

by | Nov 10, 2022 | Blog, Bonds

Year-over-year, CPI rose 7.7%, down from the 8.2% pace reported the month prior and the fourth consecutive month of cooling price pressures, albeit still near a four-decade high. It rose 0.4% in October, less than the 0.6% gain expected and following a similar increase in September.

 

Source: Numera 11.10.2022

 

Excluding food and energy costs, the core CPI rose 0.3%, less than the 0.5% gain expected after a 0.6% increase in September. Year-over-year, core CPI increased 6.3%, down from the 6.6% gain the month prior.

 

Source: Stifel. As of 11/10/22.

 

CPI m/m:            +0.4%    (vs +0.6% exp)

CPI y/y:               +7.7%    (vs +7.9% exp)

Core m/m:         +0.3%    (vs +0.5% exp)

Core y/y:            +6.3%    (vs +6.5% exp)

Differences between Core and headline CPI m/m were driven by Food +0.6% vs Energy +1.8%.

 

On the jobs front, initial jobless claims rose 7k from 218k to 225k in the week ending November 5, a four-week high. They were expected to rise to 220k, according to Bloomberg. All in all, a good morning for the Fed.

 

Our Thoughts

 

Source: Twitter. As of 11/10/22.

 

This is an encouraging report for the Fed but doesn’t mean we see a change of plans from the Fed. They’d like to see a series of month-on-month core numbers that annualize to something in the direction of 2%. The past three months still annualize to ~6% and the last two months annualize to 5.4%.

The report will probably cement a 50-bp hike in December, unless we see a monster November jobs report / CPI report December 13th. They’ve expressed a desire for clear slowing, which we haven’t yet seen.

 

Source: Bloomberg. As of 11/10/22.

 

From here, we are encouraged by the slower than expected inflation but the biggest question from here is the peak rate, and unless we get several reports like this one, we think ~5% remains a good estimate for the terminal rate.

 

The Details

 

We saw a sizable decline in used cars -2.4% and health care services -0.6%. Core goods in general were also soft at -0.4%. Shelter stayed elevated at 0.8%, but OER and Rent lag market rents and are reflecting peaks in those areas this time last year. Market rents have slowed sequentially and thus there is a good runaway for a slowing in OER and Rent in 2023 although we expect elevated prints for the next several months.

The unrounded core increase was +0.27% m/m, which is the softest print since Sep 2021.

We do know year over year comps get easier for a deceleration in inflation. We continue to believe that wage inflation is still a big problem. We also see energy inflation coming back (absent a Russia-Ukraine deal) following the end of SPR releases after the elections.

We will get a number of Fed speakers today and the rest of the week – we will closely watch to see if they continue with the hawkish message or not.

But 50 bps in December is now the base case: @NickTimiraos:

 

Source: Twitter. As of 11/10/22.

 

 

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The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy.  

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