The Market Today

Inflation Pressure Rises Further, Broader

by Craig Dismuke, Dudley Carter


Inflation Pressure Rises Further, Broader: Consumer inflation was, again, hotter than expected in the January report.  Headline CPI rose 0.6% MoM (exp. +0.4%) and core rose 0.6% (exp. +0.5%).  This brought headline CPI up from 7.0% YoY to 7.5% and core from 5.5% YoY to 6.0%. The details show broad pressure.  Food prices rose 0.9% bringing the YoY rate up to 7.0%, its highest since 1981.  Energy prices rose just 0.9% but household energy prices spiked on a 4.2% increase in electricity costs.  The largest component in the CPI calculation, owners equivalent rents (24.3%) rose 0.42% MoM, now up 2.16% over the last five month which is the strongest five month gain since 1990.  Household furnishing rose 1.6% MoM, another monthly record. Recreation prices jumped 0.9% MoM, apparel prices gained 1.1%, medical care rose 0.7%, and other goods and services rose 0.8%.  By segment of the economy, core goods prices rose another 1.0% bringing the YoY rate to 11.7%, the hottest since 1974. Core services prices gained 0.4% MoM bringing the YoY rate to 4.1%, the hottest since 1992.

There were only a handful of components that showed easing of price pressure.  Car rental prices fell 7.0% MoM and lodging away from home prices fell 3.9%; both categories remain very elevated very pre-pandemic levels.  New car prices were unchanged in January. A drop in postage and delivery services helped keep communication prices flat for the month.

Jobless Claims Continue to Improve: Initial jobless claims fell more than expected in the week ended February 5, down 16k from 239k to 223k, marking the lowest level since the final week of 2021. Non-seasonally adjusted claims also declined and appear to be back on a more typical trend after Omicron disrupted the normal seasonal pattern around the turn of the year. Continuing jobless claims were flat at 1.621mm for the week ended January 28, disappointing expectations for a marginal improvement but still holding at a low level consistent with the pre-pandemic trend.

January Treasury Budget Statement: At 1:00 p.m. CT, Treasury will release its January Budget Statement which is expected to show its first monthly surplus in 28 months.  Richmond Fed Bank President Barkin is slated to speak tonight at 6:00 p.m.


Fed’s Mester Not Compelled to Raise Rates 50 bps in March: Cleveland Fed President Mester, a current-year voter, supports a rate increase at the March meeting but doesn’t see a “compelling case” for a 50-bp hike. Mester noted that differences between today’s economy and the economy during the last tightening cycle warrant a faster pace of rate increases and a quicker rundown of the Fed’s investment portfolio. She expects inflation will moderate but still remain above 2% for the next two years. Inflation trends in the first half of the year will determine if the Fed may need to speed up or slow down the pace of tightening. While the median official in the Fed’s December forecast projected rates will not reach the neutral estimate until at least 2025, Mester said there are some officials that “do believe we’re going to have to get interest rates above neutral. I suspect we will, but I don’t see an immediate need to do that.”

Boston Fed Finds Its Next President: The Boston Federal Reserve Bank announced Wednesday that it had selected Susan Collins to replace Eric Rosengren as the president of the bank. Ms. Collins is currently a professor at the University of Michigan while also serving as Provost and Executive Vice President for Academic Affairs. According to the University’s website, Collins is currently a nonresident fellow at the Brookings Institution, is a “member of the Board of Directors of the Federal Reserve Bank of Chicago, a member of the Council on Foreign Relations, and a research associate at the National Bureau of Economic Research.” She received an economics degree from Harvard and a doctorate from MIT. Collins will assume her new position at the Boston Federal Reserve Bank on July 1 and will immediately have a vote on policy decisions for the remainder of the year.


Stocks Rallied Again, Treasury Curve Flattened around the 5-Year: Stocks extended a rally Wednesday even as Treasury yields bounced in the afternoon to close well off session lows. Tech strength lifted the Nasdaq 2.1% and continued to lead broad-based gains that pushed the S&P 500 up 1.5%. All eleven underlying sectors and 85% of the S&P’s 500 components closed higher on the day. Gains for the U.S. indices finished off a strong day globally that saw stocks rise just under 1.6% in Asia and more than 1.7% across Europe. Treasury yields had tracked falling yields in Europe for the first half of trading before recoiling higher in the afternoon. The 10-year German yield ended 5.3 bps lower, breaking a record string of eleven consecutive daily increases and pulling the yield down from its highest level since January 2019. The 10-year Treasury yield briefly touched a new session low below 1.91% after a strong auction of 10-year notes stopped through by more than 2 bps. For a second day in a row, a Treasury auction saw a record-low award for primary dealers as indirect interest hit a new all-time high. Demand has clearly picked up with yields at multi-year highs. Yields would rebound, however, sending the 10-year yield to close down 2.2 bps at 1.94% and nudging the 2-year yield up 2.3 bps to 1.36%.

Market activity quieted down overnight ahead of this week’s most anticipated economic data. Mixed and modest changes for global equities helped keep U.S. index futures close to opening levels ahead of this morning’s CPI inflation data. Treasury yields were also hovering just under Wednesday’s closes, with the 2-year yield 0.9 bps lower at 1.36%, the 5-year yield down 1.5 bps to 1.80%, and the 10-year yield down 0.5 bps to 1.93%. Yields shot up to new session highs after the hotter-than-anticipated CPI data, sending the 2-year yield 6.0 bps higher on the day to 1.43% and the 10-year yield up 3.3 bps to 1.97%.

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