CPI Brings Relief at the Short End, but Trade Uncertainty Weighs on Duration: Nov. 13, 2024

Market participants are breathing a sigh of relief in response to this morning’s key inflation report. October’s CPI arrived exactly as anticipated, causing rate watchers to dial up the probability of another 25-bp Fed trim in December. Not so fast though, fixed-income performance is being heavily influenced by the duration profile of portfolios, with bifurcated action across the short and long ends. Indeed, a hastier projected walk down the Fed’s monetary policy stairs is coinciding with worries that tariffs and critical trade hawk appointees may reverse goods disinflation by disrupting existing commerce relationships. Still, sticky price pressure expectations aren’t interfering with the enthusiasm of the Trump trade, with cyclical stocks, value sectors and bitcoin outperforming today.

The Fed’s Inflation Battle Isn’t Done Yet

The Fed’s battle against inflation produced somewhat mixed results in October, with the Consumer Price Index (CPI) climbing 0.2% month over month (m/m) and 2.6% year over year (y/y). Both numbers matched expectations and the m/m result was unchanged from September; however, the 12-month figure increased from 2.4% in the preceding month. The core version of the indicator, which excludes food and energy due to their volatile characteristics, also matched estimates and was unchanged from September’s m/m and y/y gains of 0.3% and 3.3%, respectively. The used cars and trucks category climbed 2.7%, the largest increase among CPI constituents. Cox Automotive reports that the inventory at the start of October, at 2.15 million units, was down from 2.18 million m/m and fell 4% y/y. Hurricane Helene is suspected of increasing sales during the second half of September to replace flooded vehicles. Indeed, CARFAX (KMX) reports that as many as 138,000 were damaged during the storm.

Other categories with price gains and the amount of the increases were as follows:

• Energy services (electricity and heating), 1%
• Shelter, 0.4%
• Transportation services, 0.4%
• Medical care services, 0.4%
• Food at dining establishments, 0.2%
• Food at markets, 0.1%

Prices for new automobiles were unchanged while apparel and gasoline stickers contracted by 1.5% and 0.9%.

The Trump Trade Gains Steam

Despite lingering price pressures and trade uncertainty, markets are bullish during this strong seasonal period. The Trump equity baskets are leading this session with the cyclically tilted Russell 2000 and Dow Jones Industrial benchmarks gaining 0.6% and 0.3%. But the Nasdaq 100 and S&P 500 aren’t catching as much interest, with the former index down 0.3% while the latter is unchanged. Sector breadth is impressively positive with 9 out of 11 segments pointing north on the session and led by real estate, consumer discretionary and industrials; they’re up 1.2%, 0.8% and 0.6%. Technology and communication services are the laggards of the day; they’re lower by 0.2% and 0.1%. We’re witnessing bull-steepening action across the yield curve, with the 2- and 10-year Treasury maturities changing hands at 4.28% and 4.42%, 7 and 1 basis points (bps) lighter today. Softer interest costs aren’t weighing on the dollar, however, which is up a sharp 39 bps on the back of expected stateside economic outperformance. Indeed, Trump’s geopolitical and trade stances are expected to weigh on European activity, with the euro down to a one-year low versus the US currency. Meanwhile, the Dollar Index (DXY) this morning reached its tallest level since early May, as the American tender appreciates versus most of its major contemporaries, including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian counterparts. Commodities are also mostly higher with lumber, crude oil, silver, and gold up 0.8%, 0.7%, 0.1% and 0.1%, while copper is bucking the trend; it’s down 0.8%. WTI crude is trading at $68.43, with its mild recovery being tempered by a weak demand outlook combined with expectations of abundant supplies.

Economists and Forecast Traders Diverge Over PPI

Looking ahead to the rest of the week, there’s plenty of Fed and ECB speak coming, including chief Powell, as well as critical domestic reports on wholesale prices, unemployment claims and retail sales. Tomorrow’s Producer Price Index (PPI) is certainly top of mind, with stock and bond bulls alike hoping that it reflects modest pricing pressures in the pipeline that can prop up rate cut expectations into 2025. Furthermore, one thing we noticed here at the economics desk is a wide discrepancy between the consensus PPI projection and the IBKR Forecast Trader threshold. Indeed, Wall Street is estimating a y/y figure of 2.3% while our Forecast Traders are much lower, with a PPI projection above 1.3% priced at just 75%. A figure of 1.3% would require a massive and highly unlikely 0.7% m/m decline in wholesale prices, or deflation, pointing to the potential for the Yes Forecast Contract to be correct and reward investors. Perhaps, our Forecast Traders believe that the October drop in gasoline and jet fuel costs will drive the headline much lower but getting to 1.3% is just a really narrow path for this specific report.

Source: ForecastEx

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