Wild Week in Bond Markets as Rates Plummet on “Cool” CPI, Weakening Jobs Market

Tuesday’s release of October CPI indicated prices were unchanged for the month – the first time since July 2022. The previous month saw a 0.4% increase and market analysts were expecting a 0.1% increase.  Core CPI has now climbed to 4% for the year, the lowest yearly increase since September 2021. Energy prices were down month over month. Food price increases moderated significantly as annual food inflation of 3.3% is the lowest since June 2021. This is significant as the Fed has been concerned about inflation becoming “entrenched” with consumers growing to expect daily needs expenses to climb. These trends are definitely mitigating that concern (for now). Treasuries saw their biggest rally since the March flight to quality in the wake of the regional bank failures. This was a welcome “bullish” rally that saw the 10-year T drop from 4.65% to 4.42% in about 10 minutes. Rates jumped about 10 bps yesterday even after a PPI report (manufacturers’ prices) DECREASED by 0.5% last month (the lowest since April 2020 during the pandemic, analysts were expecting a 0.1% increase). The rates jumped due in part to some profit-taking after the big rally Tuesday.

Markets instead focused on revised retail sales numbers that showed a 0.9% increase in September. Retail sales actually dipped 0.1% for October. This actually fits in with the booming 3Q GDP numbers that aren’t expected to last into 4Q. Today’s initial jobless claims report of 231,000 was 9,000 more than expected. Bond markets feeding on the “contrarian” news cycle (economic bad news is good news) rallied again today with the 10-year now at 4.43% (60 bps below the 10/23 high).

What about the Fed? Fed futures markets reacted positively to this week’s data – markets are now convinced that rate hikes are “done” and rate cuts are coming: the chances of no increase at next month’s meeting are now 100% (up from 85% last week) and they show a 68% chance of a rate cut in May 2024 (up from 35% last week). UBS analysts made news last week predicting 275 bps of rate cuts in 2024. That’s an outlier; note that Goldman Sachs’ projections call for 0.25% rate cuts in each quarter starting in late 2024. One thing for certain is that the Fed will keep “talking hawkish” until the job is done. Stay tuned…

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