The Market Today
Oil Continues Plunge as Mixed CPI Inflation Holds Near Fed’s Target
by Craig Dismuke, Dudley Carter
Mixed Inflation Report Shows Inflation Remaining Near 2%-Trend: October’s CPI inflation report showed a mixed bag for inflation, but came in largely as-expected. A 2.4% MoM increase in energy prices, which should be a temporary phenomenon given oil’s recent plunge, helped push the headline index up 0.3% MoM to a YoY rate of 2.5% (up from 2.3%). At the core level, declines in recreation (-0.1% MoM) and education/communication (-0.1% MoM) prices helped offset the strongest month for used car prices (+2.6% MoM) of the cycle. Granted, the increase in used car prices comes on the heels of the weakest month for prices of the cycle (-3.0% MoM in September). Looking at the bigger core items, housing rents returned to their trend rate, up 0.29% MoM, after a softer September. Prices for lodging away from home fell 2.1% softening the overall housing inflation tally. Overall gains in shelter prices have slowed fractionally with YoY shelter prices falling from 3.5% YoY in July to 3.17% as of the October report. Transportation prices, excluding energy components, rose a solid 0.28% MoM on the increase in used car prices and despite a 0.2% decline in new car prices. Medical care prices continue to grow at a softer-than-expected rate, up 0.17% MoM and 1.7% YoY. All told, core CPI rose 0.2% MoM but was soft enough to see the YoY rate unexpectedly tick down from 2.2% to 2.1%. Looking at a breakdown between goods and services, the larger monthly swings were contained within the goods categories which rose the most since January. However, the 12-month average MoM change for goods, which should reflect any impact from tariffs, has been essentially 0.00%. Focusing on the services categories, which accounts for most of core inflation, the 0.17% MoM change annualizes an unalarming result holding right around the Fed’s 2%-target.
Mortgage Apps Continue to Affirm Weakness in Housing Activity: Mortgage applications for the week ending November 9 fell again, down 3.2% WoW on a 2.3% drop in purchase apps and a 4.3% decline in refi apps. On a four-week moving average basis, refi apps are now at their lowest level since 2000 while purchase apps have dropped 13.5% since May and are at their lowest levels in two years. According to the most recent Bloomberg survey of economists, expectations continue to drop for the pace of home sales (new and existing) heading into 2019 on higher financing costs and higher prices.
Fed Chair and Vice Chair on the Tape Today: At 9:00 A.M. CT, Fed Vice Chair Quarles will appear before the House Financial Services panel to discuss bank regulation. More importantly for the markets, Fed Chair Powell will make his first post-FOMC meeting comments this afternoon at 5:00 p.m.
Former Fed Chair Greenspan Warns of Stagflation: Former Fed Chair Alan Greenspan said in a Bloomberg TV interview that he is “beginning to see the first signs” of inflation. He added, “We’re seeing it basically in the tightening of the labor markets first … We’re beginning finally to see average wages rise, and clearly there’s no productivity behind it. … You’re getting into a system now which has no outcome that’s in equilibrium other than inflation and no productivity growth.” If correct, this would imply the dreaded stagflation scenario.
Yesterday – Oil Sank the Most Since 2015: Stocks were little changed Tuesday and Treasurys rallied for a second time in as many sessions, but an acceleration of crude’s collapse drew the most attention. The Dow dipped 0.4% with energy companies at the bottom, but shares of Boeing, the index’s biggest contributor, dragged the most. The airline maker’s stock responded negatively to poor shipment metrics that compounded concerns around the October crash of one of its jets in Indonesia. The energy sector was also the downside outlier within the S&P 500 while more evenly-distributed effects from other sectors left the overall index off just 0.15%. Both major indices remained below their 200-day moving averages. Stocks were higher in the morning, but slowly bled away those gains as crude dropped for a record 12th session. A monthly report from OPEC forecasted even weaker global demand next year at a time when global supplies are elevated, thanks largely to record U.S. production. Speculation is building that the cartel could push for production cuts at their next meeting. Tuesday’s oil plunge was the steepest in more than three-and-a-half years (February 2015) and pushed WTI down to just over $55 per barrel. The commodity closed in a bear market for a fourth day, down nearly 28% from $76.41 on October 3. As oil sank and equities gave up their gains, Treasurys rallied to push yields to close near their daily lows. The 2-year yield closed down 3.3 bps while the 10-year yield dropped 4.2 bps to finish at 3.14%. The 10-year yield is down 9.7 bps over the last two sessions, the largest net two-day decline since May. Ten-year inflation expectations implied by TIPS yields dropped 2 bps to just above 2% and back near its lowest levels of 2018.
Overnight – Oil Prices and European Politics Draw Investors Attention Ahead of U.S. Inflation: The overnight session has been relatively uneventful with investors keeping an eye on oil prices and European politics as they await this morning’s U.S. inflation data. U.S. WTI initially slipped again but has since found some support, recovering 1.0% from yesterday’s rout. In Europe, Italy defied the EU by not submitting a revised budget that lowered its 2.4% deficit for 2019 back to within the previously agreed upon parameters, setting the stage for more contentious conversations and market volatility. Italian yields rose the most amid a mixed session for global sovereigns and Italian stocks were the worst performers in the region. The U.K. 10-year yield rose 6.8 bps yesterday and the Pound rallied on a report that negotiators from the EU and U.K. had agreed on terms of their divorce. The deal still faces the challenge of satisfying the various factions of the British Parliament. Already, key politicians have used strong words to both support and shred the plan which has helped cut into yesterday’s yield and currency gains. U.S. equity futures had tilted positive and Treasury yields had ticked higher before the BLS reported almost-as-expected CPI inflation for October. Yields held but stocks futures were higher after the report’s release.
November Bloomberg Survey of Economists – Economists Expect Slightly More Government Spending, Fed Funds to Plateau Near 3.00%, and Slightly Higher Rates: In the initial post-election Bloomberg Survey of Economists, forecasts for GDP growth were raised fractionally for 2019 on stronger personal consumption and government spending. Personal consumption is now expected to increase 2.7% in 2019, up from 2.6%. Expectations for improving consumption are based on ever-stronger job growth projections. Arguably the biggest change in the November survey results, government spending is now expected to grow 0.1% to 0.3% faster each quarter of 2019. The stronger outlook for government spending likely reflects the increased likelihood of an infrastructure spending package given that Democrats now control the House, the President has previously championed an infrastructure spending deal, and few other legislative agenda items seem plausible. While growth is expected to be slightly better, inflation expectations were largely unchanged. Economists continue to expect the Federal Reserve to hike its target overnight rate range once in 4Q18, again in 1Q19, again in 2Q19, and are torn over the possibility of a third hike in 2019. For the second month in a row, interest rate projections were raised across the board. The 2-year Treasury yield is now expected to end 2018 at 2.93%, up 4 bps from the October survey and almost 60 bps from forecasts coming into the year. The 10-year Treasury yield is now projected to end 2018 at 3.20%, 3 bps higher than the October survey and 30 bps above forecasts coming into the year. Click here to view the full survey.