The Market Today

Another Hot Inflation Report Bolsters Case for Quicker Taper


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Another Hot Inflation Report Bolsters Case for Quicker Taper: Consumer inflation was, once again, hot in November.  Headline CPI rose 0.8% MoM bringing the YoY rate up to 6.8%, its highest level since 1982.  Food prices rose 0.7% MoM bringing its YoY rate up to 6.1%.  Energy prices climbed another 3.5% MoM, after increasing 4.8% in October.  Contributing to higher energy prices was a 6.1% gain in motor fuel prices.  Excluding food and energy, core CPI rose 0.5% MoM bringing its YoY rate up from 4.6% to 4.9%, the highest reading since 1991. Goods inflation increased 1.4% MoM while services gained 0.4%, both above their 12-month run rates.  Housing CPI rose 0.5% MoM as rent equivalents continued to run hot. Owners equivalent rent rose 0.44% MoM bringing the YoY rate up to 3.5%.  On a three-month over three-month basis, OER is now up 4.6% marking the fastest rate since 2006.  The hardest hit categories during the pandemic remained volatile. Airfares rebounded 4.8% MoM, lodging away from home gained 2.9%, and apparel prices climbed 1.3%.  The chip shortage continued to pressure auto prices.  Used car prices rose 2.5% MoM while new car prices climbed another 1.1%. Excluding these volatile categories, consumer inflation broadly continues to climb.  As the last major report before the Fed’s policy meeting next week, these results are likely to bolster the case for a quicker taper process.

 

Consumer Confidence and the Government’s Budget Deficit: The University of Michigan’s initial look at consumer confidence for December (9:00 a.m. CT) is expected to show a slight bounce from November’s report which showed the weakest confidence in ten years.  Also on the schedule, Treasury will release it’s November Budget Statement (1:00 p.m.).


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OTHER ECONOMIC NEWS

Household Net Worth Rose in 3Q at the Slowest Rate of the Recovery: Household net worth rose $2.36 trillion in the third quarter, a sixth consecutive quarterly increase but the smallest of the recovery. Home prices continued to appreciate and accounted for majority of the $2.67 trillion increase in consumer assets, although the pace slowed from the second quarter. The more modest increase was consistent with home price data from S&P CoreLogic, which showed prices rose by an average monthly pace of 1.2% in the third quarter compared with a 1.8% average increase in the second quarter. The boost from financial assets was much smaller as equity holdings posted a small decline, consistent with mixed changes for the major indexes last quarter. The Dow slipped 1.9% while the S&P 500 rose 0.2%. Total liabilities rose $305 billion, primarily on larger mortgage balances.

 

TRADING ACTVITY

Market’s Upside Momentum Paused Thursday ahead of Key Inflation Report: Thursday brought an end to a strong rally for U.S equities and sharp rise for U.S. Treasury yields spurred this week by receding fears around the omicron variant. After rising 3.6% from Monday to Wednesday, the S&P 500 fell back 0.7% and closed at session lows. The losses were spread across most sectors as health care and consumer staples posted lonely gains. Treasury yields have been under pressure this week as risk assets recovered, leading to a net steepening of the curve through Wednesday on notably higher yields. Longer yields, however, pulled back Thursday and the curve flattened as shorter yields inched higher following a solid jobless claims report and ahead of this morning’s CPI inflation data. The 10-year yield dropped 2.2 bps to 1.50% but remains up roughly 15 bps for the week. An auction of 30-year Treasury bonds posted a sizeable tail, nudging longer yields up from their daily lows. The 2-year yield rose 0.6 bps to 0.69%, right on top of its cycle-high.

Both equity futures and Treasury yields moved higher overnight in front of this morning’s inflation data. Globally, equity markets remained subdued following the overwhelming optimism earlier in the week while sovereign yields had generally moved higher. U.K. yields were among few exceptions. Shorter yields there led a broad decline across the curve as a weaker-than-expected monthly GDP report for October added to suspicions that a more uncertain growth outlook, considering renewed spread of the virus has led to new virus restrictions, may tamp down the Bank of England’s hawkish ambitions at next week’s meeting. Just ahead of the CPI report, U.S. index futures were up around 0.3%, the 2-year yield had added 2.9 bps to 0.72%, and the 10-year yield was 1.0 bp higher at 1.51%. Yields pulled back and were mixed after the report (2-year +0.3 bps, 10-year -0.5 bps), implying markets had priced in at least some probability of another hotter-than-expected monthly price increase.

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