Finfacts XXIV – No. 439

Wednesday’s CPI report indicated a 0.2% monthly increase in prices and a 2.6% annual increase, as expected. Inside the numbers: energy costs were flat (after declining for months), food up 0.2% and, again, shelter costs increased unexpectedly 0.4%. The shelter component accounted for over 50% of the total gain (keep in mind the wonky “owner survey” methodology of this component). The closely watched wages component increased 0.1% monthly (1.4% annually). Thursday’s PPI report (wholesale index, which can be predictive of CPI) showed a “bump” in inflation. Core PPI (excluding food and energy) rose 0.3% monthly and 3.5% annually. Wholesale goods prices remained nearly flat. However, services prices jumped 0.3% for October after gaining 0.2% in September. More on services: monthly airline fares were up 3.2%, healthcare cost up 0.5%, and the closely watched “party finished goods” component increased for the first time in three months. The job market showed strength, as new claims fell to 217,000 (vs. 225,000 expected). The takeaway: the road to 2.0% continues to be bumpy and is not “assured.”

Fed Chair Powell spoke in Dallas yesterday: “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength…gives us the ability to approach our decisions carefully.” He described the domestic growth “by far the best of any major economy in the world.” His remarks triggered sell-offs in the stock and bond markets, along with recalibrations in the Fed Futures market. In recent months, the Fed has pivoted from inflation to concerns over a weakening labor market (a major factor in September’s 50 bp rate cut). However, Powell indicated that concern about jobs is alleviating. He mentioned that the labor market is “holding up well” and now attributes the recent disappointments to storm damage in the Southeast and labor strikes (Ports, Boeing – both are now settled). He also noted the “flattening” of the unemployment rate. 

Powell summation: “We want to go down the middle and get it just right so that we’re providing support for the labor market but also helping enable inflation to come down. So going a little slower, if the data let us go a little slower, that seems like a smart thing to do.”  Translation: Be ready for “pauses” in the rate cutting cycle. Steady cuts are no longer the “baseline” assumption, and, of course, it’s data dependent as always. The Fed’s diminishing concern for the labor market removes the main impetus for rate cutting, as it seems inflation has a long and bumpy road to 2.0%.

The 10-year Treasury spiked to 4.49% this morning, testing the 4.50% “key resistance level.” At press time, it’s at 4.42%. (Note that “key resistance” is the level at which potential treasury buyers are expected to step in; today, they did.) The Dow is down 350 points, as future Fed cuts that were priced in are now being priced out. Futures markets are pricing a 60% chance of a 25 bp cut in December (30 days ago, it was 87%). Also, the markets are looking at three rate cuts next year (last month, five rate cuts were expected). Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.