“Cooler than Expected” CPI and “Dovish” Fed Speak Drive Yields Down
The Wednesday release of December’s CPI report showed a 0.4% monthly increase (2.9% annually). Markets focused on the core numbers – 3.2% annually (3.3% expected) and 0.2% monthly (0.3% expected). 2023: 3.3% headline and 3.9% core. Wonky component alert: housing costs (partially dependent on “owner equivalent rent” surveys and responsible for 36% of CPI) rose 4.6% this year. The housing element peaked at 8.2% in March 2023. Ironically, high rates are keeping homeowners in their homes, which “freezes” and perpetuates the owner equivalent rent, which is not based on any actual purchases.
Meanwhile, apartment units are coming online from construction projects begun prior to 2023, which helps lower that side of the index. Treasuries staged a “relief rally” as some bearish option positions were unwound. Fed Reserve Governor Waller’s comments the next day continued the rally. He indicated that multiple rate cuts this year are still on the table as he expects inflation to ease further.
The next Fed meeting is considered a lock to be a “pause” (Waller: “January, we need to kind of see what’s going to happen” aka “we’re pausing”). However, futures markets for May/June indicate a likelihood of a cut in the first half of the year. Waller expects possibly 3 or 4 cuts this year, but of course, everything is (you guessed it) “data dependent.” Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.