The Market Today
Headline CPI Climbs to 7.0% in December
by Craig Dismuke, Dudley Carter
Consumer Prices Jump More-Than-Expected on Mixed Underlying Details: Consumer prices climbed another 0.47% in December, bringing the year-over-year rate up from 6.8% to 7.0%, the highest rate since 1982. Food prices climbed 0.5% bringing their year-over-year rate up to +6.3%. Energy prices dipped 0.4% bringing their year-over-year rate down to +29.3%. Apart from food and energy prices, core prices rose another 0.55% bring the year-over year rate up from 4.9% to 5.5%, the highest rate since 1991. Owners equivalent rents rose 0.40% MoM, a slightly slower rate than the past three months, but still firm. The categories hardest hit by the pandemic showed relatively firm price gains. Airfares rose 2.7%, lodging away from home rose 1.2%, and apparel prices jumped 1.7%. This marked the second largest monthly increase for apparel prices in records going back to 1947. Auto prices remained hot with new car prices up 1.0% and used car prices up another 3.5%. Looking at the report broadly, there were some categories that showed an easing of inflation in December, but others that showed continued pressure. Inflation continues to push through the goods side of the economy with core goods CPI up 1.2% MoM bringing the year-over-year rate up to +10.7%. Core services, however, moderated from recent reports, up 0.3% which brought the year-over-year rate up to 3.7%.
Mortgage Applications Bounce but Mortgage Rates Rising: Mortgage applications for the week ending January 7 rose 1.4%. After dropping sharply in the previous week, purchase apps regained 2.2% while refi apps slipped another 0.1%. The 30-year mortgage rate jumped 19 bps to 3.52%, its highest level since early-2020.
Beige Book and Monthly Budget Statement: The Fed will release its Beige Book report (1:00 p.m. CT) in anticipation of their January 26 FOMC meeting. Focus will be on the breadth of the inflation issues. Also today, Treasury will release its December monthly Budget Statement which is expect to show the 12-month deficit decline. Minneapolis Fed Bank President Kashkari (non-voter) is scheduled to speak on the economic outlook (12:00 noon).
OTHER ECONOMIC NEWS
Powell Said Fed Will Tighten Policy to Tame Inflation, Citing Stable Prices As A Key Condition for Sustained Labor Market Strength: Fed Chair Powell appeared before a Senate committee for a confirmation hearing Tuesday morning related to his appointment by President Biden to serve a second term as Chair. While Powell’s confirmation is presumed, investors were keen to hear any commentary on monetary policy as they brace for the Fed to embark on a process of tightening monetary policy to combat historic inflation. The labor market is rapidly approaching or may already be at full employment, Powell said. However, “To get the kind of very strong labor market we want, with high participation, it is going to take a long expansion. To get a long expansion we are going to need price stability. And so in a way, high inflation is a severe threat to the achievement of maximum employment.” While pledging to “use our tools to get [inflation] back,” he didn’t go as far as some of his colleagues who have recently called for raising rates as early as March. While no decisions have been finalized on next steps for the balance sheet, Powell again said it’s clear that shrinking the balance sheet will occur “sooner and faster” than after the financial crisis, noting that the process will likely begin later this year.
Mester On Board with March Hike: Cleveland Fed Bank President Mester, a current-year voter, said included three rate increases for 2022 when she submitted her updated forecasts at December’s meeting. She said the economy is strong and inflation is more persistent than she previously anticipated. If those trends hold in the incoming data, she would support raising rates at the March meeting. Mester said she would like to put a plan in place for running down the balance sheet, a process she expects will be “much faster than…last time,” and use rate hikes as the active tool to tighten policy.
Fed’s George Supports Tightening, Acknowledges Transition Brings Risk: Kansas City Fed Bank President George, who has a vote on policy decisions this year, said “the time has come to transition monetary policy away from its current crisis stance towards a more normal posture in the interest of long-run stability.” George stressed that “policymakers will need to grapple with the appropriate speed and magnitude of adjustments across multiple policy tools” and acknowledged that the policy “transition could be a bumpy one, with the prospect of asset valuation adjustments and the recalibration of supply and demand towards a new equilibrium.”
Bostic Believes March Hike May Be Appropriate: Atlanta Fed Bank President Bostic spoked ahead of President Mester earlier in the day and repeated, nearly verbatim, her projections for policy. “If the numbers continue to come in the way they have over the past several months, I think a March liftoff would be appropriate,” Bostic said. “We are ready to act to make sure that inflation does not run away from us,” Bostic noted, saying “That is the most important message that people should hear.”
Stocks Bounced Back as Treasury Yields Pared A 2022 Surge: Stocks rebounded Tuesday to end a recent sell-off that was sparked last week by a spike in Treasury yields and had so far spoiled the new year for equity bulls. While today’s inflation report has loomed large on the calendar, markets tuned in for Fed Chair Powell’s confirmation hearing Tuesday for any talk about near-term policy. Powell ensured the committee that the Fed will use its tools to bring inflation down but avoided additional specifics that may have further fueled the market’s fears the Fed may be on the verge of blindly and aggressively tightening policy (more above). The tech sector had been hit particularly hard in the recent sell-off but was at the front of the pack in yesterday’s bounce. The Nasdaq recovered 1.4%, moving most noticeably during Powell’s comments, while the S&P 500 rose 0.9% and the Dow gained 0.5%. Energy companies actually outperformed the tech sector within the S&P 500 as oil prices rallied amid the broader recovery in risk sentiment. U.S. WTI jumped nearly 4% to close above $81 per barrel, its highest mark since November 11. Treasury yields had risen overnight but receded during the relief recovery for equities. The 2-year yield ended the day 1.2 bps lower at 0.88%, the 5-year yield slipped 2.0 bps to 1.50%, and the 10-year yield fell 2.5 bps to 1.74%.
The strong gains for U.S. equities on Tuesday gave a lift to markets in Asia and Europe while U.S futures and Treasury yields moved more modestly ahead of this morning’s CPI report. Data overnight showed consumer and producer price inflation in China slowed in December to 1.5% and 10.3%, respectively, annual rates that came in below economists’ expectations. A report last week from the Eurozone reflected a stronger acceleration in headline and core inflation than was anticipated to 5.0% and 2.6%, respectively, both records. Led by energy and tech, the MSCI Asia Pacific Index rose more than 1.5% while Europe’s Stoxx 600 traded 0.4% higher. Immediately ahead of the CPI data, futures tracking the S&P 500 had risen 0.2% and were trailing a 0.3% gain for the Nasdaq. Treasury yields were mixed, diverging with broader declines for curves across Europe. The 2-year yield had added 0.8 bps to 0.89% while the 10-year yield slipped 0.7 bps to 1.73%. Yields initially moved up after monthly inflation rates edged higher than expectations before edging back down to pre-release levels.