The Market Today
Broad Gains in Consumer Inflation Unlikely to Bolster the Transitory Argument
by Craig Dismuke, Dudley Carter
Mortgage Applications Inch up on Better Purchase Apps: Mortgage applications for the week ending October 8 inched up 0.2%. Refinance apps fell 0.5% as the average 30-year mortgage rate rose another 4 bps to 3.18%, now up 21 bps since the end of July. On a positive note, purchase apps rose 1.5% but remain down 17% from their January average.
Broad Gains in Consumer Inflation Unlikely to Bolster the Transitory Argument: Consumer prices rose 0.41% MoM in September at the headline level as food prices jumped 0.9% MoM on a 1.2% increase in food-at-home, the largest single-month increase since 2008. Energy prices were also firm, up another 1.3% on a 3.1% gain in fuel oil and a 2.7% increase in piped utility gas. This brought the year-over-year headline CPI rate up from 5.3% to 5.4%.
Details Show Expected Gains in Rents: Core prices, excluding the historically volatile food and energy categories, rose a more modest 0.24% MoM keeping the year-over-year rate unchanged at 4.0%. The details of the report show concerning rates of inflation in several key categories which were partially masked by volatile pandemic-effected categories. Housing CPI jumped 0.55% on a 0.43% gain in rent equivalents, the largest monthly gain since 2006. As the largest contributor to the CPI basket, the expected rise in rent equivalents is particularly concerning for the transitory definition. New car prices continued to rise at a concerning pace, up 1.3% in September, although used car prices pulled back 0.7%. Nondurable and durable goods prices both rose 0.4% while services prices rose 0.3% as inflation continues to come from both sides of the economy.
Continued Volatility Masking Broader Increases: Dragging the core numbers lower were continued volatility in airfares, clothing, and lodging. Airfares plunged 6.4% and are still down 23% from their pre-pandemic level. Clothing prices fell 1.1% on a 2.7% drop in women and girls apparel. Lodging prices dropped 0.6%. Apart from the weakness in these categories, the report shows continued, broad inflation pressure with particular concern coming from rents, food, and energy prices. This report will not do much to bolster the transitory argument.
Fed Minutes and Fedspeak: The Fed will release its September FOMC Meeting Minutes at 1:00 p.m. CT. While the Minutes would typically be a treasure trove of insight ahead of a potential change in policy, last week’s disappointing jobs report quickly dated the Minutes. Rather, the continued flurry of Fed speakers this week, including eight of eleven voting members in 2021, will provide more timely relevance. Fed Governor’s Brainard (3:30 p.m.) and Bowman (7:00 p.m.) are on the calendar today.
YESTERDAY’S ECONOMIC NEWS
Lack of Supply, Not Demand, Plagued Tight Labor Market in August: The August JOLTS data indicated that while demand for labor may have been impacted by Delta’s spread, a shortage of workers remained the bigger issue. Job openings fell from a record-high 11.098 million at the end of July to 10.439 million at the end of August, the first decline this year but still the second highest level in the series’ 21-year history. While the hires rate slowed, not a surprise considering the known results in the nonfarm payroll report, layoffs fell to a new series low while quits rose to a new record high, signs of a tight labor market. Within the details, openings at goods-producers fell 43k, with manufacturing’s 36k drop marking the first of 2021. Job postings at trade, transportation, and utilities companies bounced back from a drop in July, but most other sectors reported declines. After jumping more than 200k each in July, openings for private education and health services workers and leisure and hospitality employment fell by more than 200k each. Health services, not education, drove most of the decline. There were 240k fewer state and local government openings, with roughly half of the decline tied to education.
Support for Tapering Announcement Soon Intact after Disappointing Jobs Report: Fed Vice Chair Clarida and Atlanta Fed President Bostic, both 2021 voters, and St. Louis Fed President Bullard, who will vote in 2022, separately indicated Tuesday that their expectations for tapering to be announced soon was not impacted by Friday’s lackluster payroll figure. As has been the case, Bullard repeated that he would prefer tapering to start in November and be completed by the end of March.
Fed Officials Seem Increasingly Bothered by Inflation: All three of those Fed officials also seemed more anxious about inflation. Clarida said, “I continue to believe that the underlying rate of inflation in the U.S. economy is hovering close to our 2% longer-run objective” and that “once these relative price adjustments are complete and bottlenecks have unclogged,” the unusually strong inflation pressures will “prove to be largely transitory.” However, “the risks to inflation are to the upside.” Bostic admitted, “It is becoming increasingly clear that the feature of this episode that has animated price pressures — mainly the intense and widespread supply-chain disruptions — will not be brief. …By this definition, then, the forces are not transitory.” “I believe evidence is mounting that price pressures have broadened beyond the handful of items most directly connected to supply-chain issues or the reopening of the services sector,” he said, noting, “These upside risks to the inflation outlook bear watching closely.” Bullard supports a quicker tapering process than the consensus “because I want to be in a position to react to possible upside risks to inflation.” “There’s no reason for us to commit one way or another at this point,” Bullard went on, adding, “I just want to be in a position in case we have to move sooner that we’re able to do so next year in the spring or summer if we have to do so.”
S&P 500 Slipped for Third Straight Session Since Friday’s Murky Payroll Report, Treasury Yields Active in Their Return from a Holiday: Equity futures had held their ground overnight and the major indexes flipped between modest gains and losses throughout the morning. Sentiment, however, softened in the afternoon and stocks dipped late as investors awaited the kick-off of the corporate earnings season today. The S&P 500 fell 0.2%, the Dow slipped 0.3%, and the Nasdaq notched a smaller 0.1% decline. Sectors diverged with roughly half posting declines on Tuesday, including financials and industrials and led by losses for tech names. Losses for financials piled up as the early-morning curve flattening intensified into a midday auction of 10-year Treasury notes. Although the bid-to-cover ratio eased, the auction stopped through and primary dealers’ awarded share ticked lower as direct and indirect bids picked up, reflecting solid demand. The 10-year yield closed down 3.5 bps on the day to 1.58%. Shorter maturities, however, pressed higher as Fed officials signaled continued support for tapering, despite last Friday’s soft hiring figure, and persistent anxiety around inflation (more above). The 2-year yield added 2.0 bps to 0.34%, the highest since March 2020, while the 5-year yield rose 1.1 bp to 1.07%, a new high since February 2020. The more than 5 bps of flattening between the 2-year and 10-year yields, the sharpest since mid-August, compressed the spread to 123.7 bps.
Equity futures reversed higher again overnight prior to the kickoff of bank earnings but the Treasury curve continued to flatten before the release of September’s CPI data. Markets have become more anxious since early September on signs that economic imbalances are weighing on growth and stoking inflation. That theme led the IMF to cut its near-term growth outlook in updated forecasts yesterday and will be an idea investors search for in the Fed’s Minutes later this afternoon. S&P 500 futures had gained 0.2% just before 7 a.m. CT. Shares of JPMorgan were 0.6% higher following the release of a solid earnings report that included revenue and earnings figures that topped expectations. Just before the CPI data were released, the 2-year Treasury yield had added 1.4 bps to 0.35% while the 10-year yield had declined 1.0 bps to 1.57%. With details of the CPI report showing a bit of firmness away from the pandemic-disrupted categories, the 2-year yield climbed to up 4.2 bps on the day to 0.38%, the 5-year yield was 3.9 bps higher at 1.11%, and the 10-year yield rose 1.6 bps to 1.59%.