The Market Today

Another Hot Inflation Report Adds to Concerns as Services Ramping Up


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Another Hot Inflation Report Adds to Concerns as Services Ramping Up: Consumer prices rose 0.8% MoM at the headline level in February, in-line with expectations. Incidentally, headline CPI has only come in weaker-than-expected twice in the past 21 months.  On a year-over-year basis, headline prices are now up 7.9%, the fastest rates since 1982.  Energy prices jumped 3.5% during the month which only reflects an initial fraction of the full spike in energy commodities.  Food prices continue to be hot, up another 1.0% bringing the YoY rate up to 7.9%, its highest since 1981.  Excluding food and energy, prices climbed 0.5% MoM bringing the YoY rate up from 6.0% to 6.4%, this highest since 1982.  On a positive note, core goods prices rose just 0.4%, the slowest rate in five months.  Core goods inflation is now up to 12.3% YoY, the fastest rate since 1974. However, as feared, while goods inflation is showing fractional evidence of moderating, services inflation is ramping up even more.  Core services inflation rose 0.5% MoM. Helping push services prices higher, owners equivalent rents climbed another 0.5% MoM bringing the YoY rate up to 4.3%, the fastest rate since 2002.  The pandemic-affected categories added to price gains in February.  Airfares rose 5.2%, lodging away from home prices rose 2.2%, and new car prices inched up another 0.3%. Used car prices pulled back 0.3%.  This report will do very little to assuage Fed concerns about broad-based inflation and the nascent rise in services inflation may increase concerns. Expectations are growing that inflation could peak as high as 9% or 10% in coming months.

Jobless Claims Rise but Remain Low: Initial and continuing claims for unemployment assistance both rose a bit more than expected last week but remain at historically low levels. On a seasonally adjusted basis, initial jobless claims rose 11k to 227k in the week ended March 5, the third lowest level of the year. Unadjusted claims rose 22k to 218k on mixed results across the country, with increases in New York and California more than accounting for the increase. Seasonally adjusted continuing claims rose from 1.469mm to 1.494mm in the week ended February 26, disappointing expectations for another decline to 1.450mm. Nevertheless, continuing claims remain near their lowest level since the early 1970s.

ECB Sends Hawkish Signal As Inflation Forces Hand, Despite Growth Risk of the War: The ECB surprised markets with a statement that showed officials are repositioning to respond to record inflation that now faces even greater upside risk as a result of surging energy prices amid the war in Ukraine. The ECB kept rates unchanged and acknowledged the heightened uncertainty Europe’s economy faces as a result of the war, disclosing that it was extending Euro liquidity facilities available to non-EU central banks. However, the ECB announced that it was accelerating the tapering process of its net asset purchases and removed a reference to the possibility that it could cut interest rates if necessary. In February, the ECB planned to buy 40B (Euros) of government bonds in the second quarter, 30B in the third quarter, and 20B each month from October until further notice. The ECB today announced that it will buy 40B in April, 30B in May, and 20B in June. If inflation plays out in line with its forecast, they said net purchases will conclude those purchases in the third quarter; they kept optionality to revise those purchase plans. The ECB also altered its guidance for interest rates, saying that rates will remain at their current levels until inflation is on track towards its target, updating the previous wording of “at their present or lower levels.” Softening the signal on the timing of rate hikes a bit, rate adjustments are expected to occur “some time” after net bond purchases end. Previously, the statement indicated that bond purchases would conclude “shortly” before rate hikes begin. “The Governing Council will take whatever action is needed to fulfil the ECB’s mandate,” the statement noted.

Household Net Worth and Federal Deficit: The Fed will release the 4Q Household Flow of Funds report at 11:00 a.m. CT. Treasury will release its February budget statement at 1:00 p.m.


OTHER ECONOMIC NEWS

JOLTS Data Edges Back from Record Level but Signals Labor Market Remained Tight in January: The JOLTS report for January, although dated and overshadowed by the crescendoing geopolitical worries, showed the U.S. labor market appeared to be even tighter than previously anticipated to start 2022. Total job openings fell from 11.448mm in December, reflecting a significant upward revision from the previous estimate of 10.925mm, to 11.263mm, higher than the 10.950mm economists had expected. December’s revised level now marks the highest in records since 2000 and January’s reading represents the second greatest number of job openings in the series’ history. In context of the broader labor market, there were 0.58 unemployed workers (6.5mm) per open position in January, second only to December’s 0.55 as signaling the tightest labor market on record; October 2019’s 0.81 was the lowest reading prior to the pandemic. Away from the openings data, the layoffs rate did inch up from a record low of 0.8 to 0.9 and the quits rate cooled from a record high of 3.0 to 2.8.


TRADING ACTIVITY

Treasury Yields Jump Strongly and Stocks Surge Back As Commodities Slide: Wild market swings continued Wednesday, beginning in Europe and continuing through the U.S. session. Commodity prices had pulled back overnight ahead of U.S. trading, providing some small relief after days of unprecedented leaps that left some commodities at multi-decade highs and others at their highest prices on record. After selling off to start the week, European equities jumped back strongly as the domestic session and continued to climb in early U.S. trading and into the local market close. Broad gains across the bloc drove the Stoxx Europe 600 up 4.7%, its biggest daily gain since March 2020. Consistent with the pre-market strength in futures trading, U.S. equity indices opened in positive territory and pushed higher throughout the day. The S&P 500 jumped 2.6% (best day since June 2020), splitting a 2.0% gain for the Dow (second best since November 2020) and a 3.6% rally for the Nasdaq (second best of the year). The drop in oil prices continued as an official from the UAE said his country would push OPEC to ramp up production and gained steam on a headline that Ukraine’s President Zelensky was open to compromise and a conversation with Russia’s Putin. U.S. WTI tumbled more than 12% to $108 per barrel, its second-biggest single-day slide since the historic crash early in the pandemic. Despite the drop in oil and alongside the bounce for equities, Treasury yields rose strongly across the curve. The 2-year yield added 8.1 bps to 1.68%, setting a new high back to September 2019. The 5-year yield rose 10.2 bps to 1.88% and the 10-year yield jumped 10.8 bps to 1.95%, both back near the trend levels prior to Russia’s invasion of Ukraine.

European Yields Lead Surge Following Hawkish ECB Decision: The war in Ukraine continues to be the major undercurrent driving volatile markets on Thursday. As is typical when big moves occur during U.S. trading hours, markets across Asia played catch-up on Thursday, jumping sharply in response to the unusually large gains elsewhere in the prior session. Japan’s Nikkei jumped 3.9% to lead the widespread regional gains that left the MSCI Asia Pacific Index up 2.5%. Oil prices were roughly 4% higher after big declines yesterday. Market sentiment, however, reversed once Europe opened as investors awaited the ECB’s update and the latest reading on U.S. inflation. Just before the ECB announced its decision, European sovereign yields were little changed just below their opening levels and the Stoxx 600 had declined 1.6% and was near session lows. After the surprisingly hawkish decision (more above), European yields surged, the common currency rallied against the Dollar, and the Stoxx 600 fell to new session lows. The German 2-year yield rose 11.0 bps to -0.42% while Italy’s 2-year yield jumped 16.9 bps to 0.15%. Germany’s 10-year yield climbed 5.2 bps to 0.26% as Italy’s soared 21.0 bps to 1.89%. The moves nudged Treasury yields up to session highs before the CPI report, with the 2-year yield 4.3 bps higher at 1.72% and the 10-year yield up 2.4 bps at 1.98%. Following the hot-but-as-expected CPI report, the 2-year yield pulled back to trade up 1.2 bps at 1.69% and the 10-year yield was 0.7 bps higher on the day at 1.96%. U.S. equity futures jumped from session lows but remained in negative territory.


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