The Market Today
Base-Effects Boost Core Inflation Above 2%, March Report Shows Signs of Firmness but No Breakout
by Craig Dismuke, Dudley Carter
Background to This Morning’s CPI Report: Core CPI was running over 2.2% YoY back in February 2017 until a series of weak inflation reports sent the rate down to 1.7% by May. Beginning in this morning’s report, the weaker inflation reports from a year ago will begin rolling off, pushing the YoY rate temporarily higher. If inflation were to average just 2.0% annualized growth each month, core CPI would rise to 2.4% YoY by July on the falling off of these weaker reports – the so called “base effects.” As such, an elevated YoY rate should be taken in context of its transience.
March CPI Data Firmer on Rebound in Medical Care and Shelter Prices: As expected, core CPI rose 0.2% MoM in March, bringing the YoY rate up from 1.8% to 2.1%. This is the first core CPI reading since last March to be above 2.0%. At the headline level, inflation fell 0.1% MoM but the YoY rate still rose from 2.2% to 2.4%. Energy prices fell 2.9% MoM while food and beverage prices rose 0.1%.
Looking at the big contributors to core CPI, there was notable strength in the March data. Shelter inflation rose 0.35% MoM, beating the 12-month average and turning the YoY rate upward following a 14-month down-trend. A rise in public transportation prices and vehicle parts offset a weaker month for new and used car prices, pushing transportation CPI (ex. energy) up 0.5% MoM. Even excluding the weaker new and used car results, the YoY rate of price gains for vehicles is now back to 0.0% (not dragging from inflation) for the first time since early 2016. And medical care prices rose 0.4% MoM in a rebound from the weaker February price data. All told, the big ticket items did show more inflation pressure in March than in February. Apart from those big ticket categories, prices showed a little less strength than in other recent reports.
Bottom line: The base effects will result in some temporarily above-target CPI reports. This was the case for the March report although there were also signs of firmer inflation from key categories embedded in the March data. This is not a break-out type of inflation report, but it does show continued firming of consumer prices.
FOMC Minutes: The March FOMC Minutes are scheduled for release at 1:00 p.m. CT. Key will be the discussion on financial market volatility, and if Fed officials are concerned about its impact on the course of policy.
Yesterday – Early Rally for Stocks Sticks as Trade Tensions Tamped Down Further: Unlike Monday’s result, stocks managed to sustain early positive momentum through to the close. Trade tensions have eased this week as comments from U.S. and Chinese officials have toned down the rhetoric around a potential tariff battle. The S&P 500 jumped at the open on conciliatory overnight remarks from Chinese President Xi. Two other notable upside moves were made after a White House trade adviser indicated doors are open for discussions with China and President Trump tweeted a thank you to President Xi for his kind remarks. Energy companies led the S&P’s widespread gains, rallying 3.3% in their biggest daily move up since November 2016. Crude prices surged in response to the broadly better tone for risk assets and after reports indicated Saudi Arabia has an $80 price target per barrel of crude. Brent crude closed above $71 per barrel and at its highest level since 2014. Treasury yields rose Tuesday as equities improved, with the 2-year yield adding 2.9 bps to 2.31%. The 10-year yield added a smaller 2.2 bps to 2.80%, leaving the 2s/10s spread below 49 bps and roughly 2 bps from its cycle low.
Overnight – President’s Warning to Russia, on Syria, Shakes Market Sentiment ahead of CPI Report: A relatively quiet overnight session for U.S. assets was shaken up after President Trump tweeted a warning to Russia that missiles aimed at Syria “will be coming, nice and new and ‘smart!’”. While the tweet turned up the pressure on risk assets, the global session was already more subdued as yesterday’s U.S. gains had failed to carry over across the Pacific. Russia said on Tuesday it would shoot down any U.S. missiles fired towards Syria. Stocks futures, which were already weaker, added to losses and the major indexes fell to down 1% and new lows for the day. Treasury yields also extended a pre-tweet dip. The 10-year yield moved from down 1.5 bps to down 3.3 bps to 2.77%. Gold spiked, the yen rose, oil prices moved higher, and the outlook for the Russian ruble turned even more bleak. The unsettling shifts shook the market’s nerves ahead of this morning’s CPI report and this afternoon’s Fed Minutes release. After this morning’s core inflation matched estimates, yields edged down a bit further. The 10-year yield was last trading down 4.7 bps at 2.75% with the 2-year yield 2.6 bps lower at 2.28%.