The Market Today
Firmer Core Inflation Ends Soft Streak for Price Data, Keeps December Rate Hike Likely
by Craig Dismuke, Dudley Carter
Firmer Core Inflation Ends Run of Softer Price Data: Headline CPI was unchanged in November thanks to firmer core inflation but a drop in energy prices. The unchanged result pushed the YoY rate down from 2.5% to 2.1% YoY. Core prices rose 0.2% MoM bringing the YoY rates to 2.2%. Energy prices fell 2.3% MoM as oil prices plunged 20% (average price M/M) and gasoline prices fell 23 cents (average price M/M). Incidentally, gasoline prices are down another 21 cents in December, thus far, likely boosting consumer sentiment and disposable income. Looking at some of the inflation drivers in November, housing inflation picked up with rent of primary residence and owners’ equivalent rents both rising over 0.30% MoM (the third strongest monthly report of 2018). Auto prices were boosted 0.8% MoM by a 2.4% increase in used car prices. Auto prices are now growing at their strongest YoY rate since 2012 (+1.5% YoY). Medical care prices also saw a stronger month, rising 0.4% MoM and more than doubling the 12-month growth rate. Apart from these key, big-ticket items, most categories showed fairly benign price gains. However, the acceleration in rent prices (housing) and medical care prices will give the inflation hawks something to worry about. Bottom line – firmer inflation pressure in some key categories keeps a December rate hike a likely outcome.
Signs of Life in Mortgage Applications: Also released this morning, mortgage applications for the week ending December 7 rose 1.6% on a 2.5% increase in purchase apps and a 1.8% increase in refi apps. The recent pullback in mortgage rates is generating a small bit of mortgage activity. The 4-week moving average for purchase applications has now bounced 9% over the past month.
Yesterday – Another Volatile Session Saw Stocks Little Changed, Treasury Yields Higher: U.S. equities erased both a steep opening jump and an afternoon attempt to reclaim positive territory to end the day close to unchanged. Early gains were tied to positive pre-market reports related to U.S.-China trade. Top trade officials from the U.S. and China held a phone call overnight that was seen as advancing discussions on a trade framework. Subsequently, there were separate reports that China would unwind a retaliatory increase in tariffs on U.S. autos. The move would take the rate from 40% back down to 15%. However, the indices pulled back after the U.S. was said to keep plans for limits on high-tech exports to China and turned negative after President Trump pledged a government shutdown if border wall funding wasn’t agreed to by legislators. The current continuing resolution keeps the government open through December 21. Stocks faded an afternoon push higher with the Dow dropping back to close down 53 points, or 0.2%. The index rose as many as 368 points intraday and was down 202 at the extremes. An auction of 3-year Treasury notes tailed with mixed demand and the short-end led a bear flattening of the curve. The 2-year yield rose 3.5 bps to 2.76% as stocks rebounded in the afternoon while the 10-year yield settled up 2.1 bps to 2.88%. The related spread dropped to 11.3 bps, a new low for the cycle. Markets’ expectations for the Fed after December perked up modestly with the chances of a lonely hike next year recovering from 44% to 62%.
Overnight – Global Markets Welcome News of Positive Trade Developments: Despite another volatile session yesterday on Wall Street, global equities have strengthened overnight on continued hopes regarding U.S. trade with China. Following reports yesterday that China would cut tariffs on U.S. autos, the Chinese CFO, whose arrest sparked a global risk sell-off last Thursday on fears it would complicate trade negotiations, was granted bail by a judge in Canada. Further relieving some pressure was President Trump telling Reuters that “I would certainly intervene,” in the CFO situation “if I thought it was necessary,” and “good for what will be certainly the largest trade deal ever made.” He added that “If it’s necessary, I’ll have another meeting with President Xi.” Chinese shares were up 0.3% but lagged larger gains in the region. The Stoxx Europe 600 was 1.3% higher, at its high of the day, and on pace for the best back-to-back trading days since July 2016. Those gains have unfolded notwithstanding more worries about the ultimate outcome of Brexit. In the latest turn, PM May will face a vote of no confidence Wednesday night London time. The Pound continues to be whipped about but was higher on media reports that she had majority support from her party. Italian assets were also in focus after an unconfirmed report that the country’s government would cut its 2019 deficit proposal to 2%. Italian stocks jumped and the country’s yields tumbled with the 10-year note below 3% for the first time since September. Before this morning’s important inflation report, U.S. stock futures were swept up in the overnight global swing higher and had gained just below 1%. Treasury yields ticked higher by 1 bps or less and steepened marginally off yesterday’s cycle-low finish.