The Market Today

CPI Hotter Than Expected in October with Large Gains in Energy, Housing

by Craig Dismuke, Dudley Carter


Mortgage Applications Benefit from Lower Rates: Mortgage applications for the week ending November 5 bounced 5.5% as the average 30-year mortgage rate fell 8 bps to 3.16%.  Purchase applications increased 2.7% while refis gained 7.4%.

Unemployment Claims Mixed: Initial jobless claims for the week ending November 6 rose fell from 271k to 267k, a smaller decline than expected, but still resulting in the lowest level of the pandemic. Initial claims continue to close in on the very low pre-pandemic level of claims.  Initial claims averaged just 212k in the first 10 weeks of 2020.  Continuing jobless claims for the week ending October 30 disappointed expectations, rising 59k to 2.16mm.

CPI Hotter Than Expected in October with Large Gains in Energy, Housing: CPI inflation was even more “eye-popping” than expected in October, up 0.6% MoM at the headline level bringing the year-over-year rate up from 5.4% to 6.2%. At the topline level, energy prices jumped 4.8% MoM as fuel oil/other fuels increased 9.4% and motor fuel increased 6.1%.  This will exacerbate concerns about the already-high costs of household fuels heading into the winter months.  Food inflation was also notably high, up 0.9% MoM.  Excluding energy and food, core CPI was also hotter than expected, up 0.6% MoM bringing the year-over-year rate up from 4.0% to 4.6%.  The hardest-hit categories by the pandemic continued to show volatility. Lodging prices rose 1.4% MoM after falling 3.5% in the previous two months.  Airfares fell another 0.7% MoM and are now down 16% over the past three months.  Car rental prices jumped 3.1% after falling 13% over the past three months.  The chip shortage and resulting shortage of automobile supply continued to push car prices higher.  New car prices rose 1.4% MoM and used car prices jumped 2.5%.  Most concerningly as it relates to the durability of above-target inflation, the largest category of both the headline and core CPI baskets, owners equivalent rents, rose 0.44% MoM, its firmest pace of gain since 2006. Other components of the report showed broad volatility, some categories sharply higher in October and others sharply lower.  But the shelter category, alone, is likely to continue adding pressure to the CPI calculations.

Wholesale Inventories, Monthly Budget Statement: Wholesale inventories (9:00 a.m. CT) are expected to have increased 1.1% in September.  Treasury’s Monthly Budget Statement (1:00 p.m.) is expected to show a $179b deficit in October, bringing the 12-month deficit down to $2.67t from a March peak of $4.1t.

Veterans Day Holiday Tomorrow: Fixed income markets will be closed tomorrow in observance of the Veterans Day holiday.  Thank you to all U.S. service members for your service and sacrifice for our country.


Fed’s Daly Says Hiking Prematurely Could Carry Undesirable Economic Consequences: San Francisco Fed President Daly believes “eye-popping” inflation levels will moderate as issues plaguing the supply side of the economy dissipate. Daly acknowledged that uncertainty around the inflation outlook remains high but noted that longer-term inflation expectations have remained relatively stable, despite the recent move higher for expectations over the near term. Daly expects to have more clarity about the economy’s trajectory around the middle of next year but cautioned that raising rates too soon could produce negative economic consequences.

Fed’s Kashkari Unsure How Long Transitory Supply-Chain Issues Will Persist: Minneapolis Fed President Kashkari said inflation has remained elevated for longer than he anticipated and is unsure how long the issues affecting the global supply chain will last. Nonetheless, he ultimately believes they will prove temporary. Considering the significant uncertainty attending the outlook, Kashkari is keeping an open mind on future policy changes. “If you look at where long-term inflation expectations are, if you look at long-term borrowing costs for Treasury, …They’re very much in check. But if something were changed, I have great confidence that the Federal Reserve would respond appropriately to meet our dual mandate, regardless of what that means for Treasury or executive branch funding.”


Stocks’ Run Ends as Treasury Yields Slide Despite Rising Inflation Expectations: Stocks finally broke off a record run on Tuesday and Treasury yields rallied lower amid a global decline in rates. The S&P 500 fell 0.4% after setting new record highs in each of the prior eight trading sessions. Sectors split in either direction as utilities and materials companies led gains while consumer discretionary shares and financials fell to the bottom. Financials were hit as downside volatility for Treasury yields drew attention. The move lower began early in Asian trading Monday evening on reports that Governor Brainard, a long-time policy dove, had interviewed for the Fed Chair position. The drop accelerated after October’s producer price inflation report matched expectations and persisted throughout the morning. The rally eased, however, after an auction of 10-year Treasury notes tailed by more than 1 bp with a larger award to primaries. The 10-year yield fell 5.4 bps to 1.44% after hitting 1.41% midday, its lowest since September 24. The 2-year yield slipped 2.2 bps to 0.42% as December 2022’s fed funds futures contract implied rate fell below 0.50%. The 5-year yield fell 3.6 bps to 1.08% while 5-year inflation expectations rose 2.5 bp to 2.99%, the highest since at least 2002; the real 5-year yield hit a three-month low of -1.91%. The yield on the 30-year inflation-protected Treasury bond slumped to a record low of -0.59%.

Treasury Yields Recover Higher after Hotter-Than-Expected CPI Report: Treasury yields did bounce overnight into Wednesday as investors’ focus turned to updates on global inflation. Prior to the U.S. CPI inflation report, consumer prices in China were reported up 1.5% YoY, the fastest in 13 months but still much slower than levels prior to the pandemic. Producer prices in China, however, jumped 13.5% compared with an expected 12.3% gain, the quickest rate since 1995. Revisions confirmed German inflation of 4.6% YoY in October, the sharpest rise in records since 1997, while several smaller European countries reported somewhat firmer gains. Higher yields were steepening most sovereign curves across Europe. Just prior to this morning’s inflation and jobless claims data, equity index futures were down between 0.2% and 0.5%, the 2-year yield was up 3.0 bps to 0.45%, the 5-year yield was 3.6 bps higher, and the 10-year yield had risen 2.4 bps to 1.47%. The sell-off in bonds deepened after the CPI inflation report came in hot, sending the 2-year yield to up 5.8 bps on the day at 0.48%, the 5-year yield to up 5.8 bps on the day at 1.14%, and the 10-year yield to 3.4 bps higher at 1.48%. Five-year inflation expectations based on TIPS jumped from below 3.00% to above 3.04%, a new record.

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