The Market Today

Bank of England Talks Future Rate Hikes; CPI Rises on Harvey

by Craig Dismuke, Dudley Carter

Today’s Calendar – Hurricane Harvey Drives Up CPI Inflation:  CPI inflation for the month of August rose 0.4% MoM at the headline level bringing the YoY rate from 1.7% to 1.9%.  Driving the larger-than-expected increase in headline inflation was a 3.3% MoM increase in energy prices which brought the YoY prices for energy items up from 3.35% to 6.91%.  Digging into the energy data, it is apparent that Hurricane Harvey had a meaningful impact, raising the price of gasoline.  Excluding the higher energy prices, headline inflation would have dropped to a more concerning 1.6% YoY.  The impact of higher gasoline/energy prices is expected to be short-lived as Texas’ refineries get back online. Excluding food and energy prices, core inflation rose 0.2% MoM keeping the YoY rate at 1.7%.  There is very little core inflation pressure in the report apart from a material uptick in rents (housing inflation).  Housing inflation rose 0.38% in August versus the 12-month average growth rate of 0.24%.  The increase gave the core inflation tally a small boost that was offset by another weak showing for medical care inflation.  Medical care prices rose just 0.13% MoM and prices are now growing just 1.8% YoY.  As one of the key drivers of the 2016 uptick in inflation, weaker medical care price gains will pose a problem for an inflation-watching Fed.


Initial Jobless Claims for the week ending September 9 fell from 298k to 284k, preserving the 132 week run of claims being below 300k.  Next week’s report will include some residual effect from Harvey and the brunt of the Irma effects.  As such, claims may finally jump above 300k.  However, even if they do, it is likely to be short-lived.


Harvey Projected to Impact Tomorrow’s Retail Sales Report:  Tomorrow’s retail sales data is the last big report of the week heading into next week’s FOMC decision.  Economists expect core sales to rise 0.2% MoM in the August data after a stellar 0.6% increase in July.  According to Bank of America’s credit and debit card data, the sales data may be even weaker.  The BofA credit card results show 1) a drop in card activity following Hurricane Harvey (particularly in the state of Texas), 2) a drop in August sales after Amazon’s Prime Day pulled an unusually high amount of sales into July, and 3) weaker back-to-school sales than expected.  As an aside, the BAC data also showed another increase in online back-to-school shopping, now up to 47% of total spending versus 22% in 2010.


Overnight Activity – Bank of England Holds But Hints at Rate Increase in Coming Months: Global equities were mixed Thursday as sovereign yields extended their climb amidst a pick-up in the pace of economic data. Asian stocks were weaker after a string of Chinese data missed estimates. August retail sales, fixed investment, and industrial production all slowed from July and fell short of the median economist’s estimate. Equities across Europe are mixed and the Stoxx Europe is less than 0.1% changed. However, the bigger story is the impact of the Bank of England’s latest decision on currencies and sovereign yields. After little change in most of the overnight session, sovereign yields climbed and the British Pound spiked. The central bank left policy unchanged but said data since the last meeting points “to a slightly stronger picture than anticipated.” The Committee concluded that if these trends continue, policy tightening could occur faster than markets currently expect with the first step coming in “the coming months”. They did stress, however, that any increases would “be at a gradual pace and to a limited extent” and nodded to the risks that remain surrounding Brexit. U.K. yields ran the most on the decision but yields elsewhere were also pressured higher. The 2-year Treasury yield moved to +1.2 bps on the day and the 10-year yield climbed to +1.8; both daily highs. After this morning’s U.S. inflation data, shorter yields rose slightly further while longer yields pulled back. The Dollar erased an initial inflation-induced jump and U.S. equity futures remain weak.


Yesterday’s Trading Activity – Dollar Climbs as Yields Rise for Fourth Session and Stocks Set Another Record: It was a last-minute jump Wednesday that pushed U.S. equity indices positive for the day. Although marginal, the gains were enough to lift the Dow, S&P, and Nasdaq to new record highs for a second day. Leading the S&P’s 0.08% gain was a 1.2% rally in shares of energy companies. Ninety-four percent of energy companies within the S&P improved as crude prices rallied 2.3%. Crude prices were already in an uptrend when U.S. trading open but accelerated after the DOE’s weekly petroleum report was released. The data showed the biggest drawdown in gasoline inventories since 1990 as a result of the Harvey-related refining disruptions. Those disruptions, however, also boosted crude inventories by the most since early March. Treasury yields rose for a fourth day and the timing of the steepest jump coincided with more remarks on tax reform. Several key GOP officials (Mulvaney, Brady, and Ryan) made optimistic remarks about tax reform around 9 a.m. CT. Those remarks included a commitment for the release of “core elements” of the tax reform plan in the week of September 25. The 2-year yield rose 1.2 bps to 1.35% and the 10-year yield added 2.1 bps to 2.19%. The 10-year yield has climbed 15 bps since last Thursday, the most over a four-day period since the late-June sell-off.

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