Tomorrow the government will release the January CPI, which consensus expect to have climbed 6.2% on a year-on-year basis. The monthly gain is seen at 0.5%, still above the kind of pace consistent with 2% inflation. The CPI rose 6.5% in the year to December.
Based upon sentiment surveys and bond yields, consensus has become substantially too complacent about inflation. The rate of today’s price increase is still at levels that would have been unimaginable for inflation about two years ago.
A minority believes the economy is not on a trajectory that will lower inflation to 2% without more interest rate increases than the market is now anticipating. Yes inflation has subsided from a 9% rate in June, the gains in terms of further reduction are going to come hard.
There are a number of factors that has been helping pull inflation down may now reverse. Two such examples are oil and used car prices, the latter of which climbed 2.5% last month, the most since the end of 2021.
Because of inflation angst, Treasuries had their biggest loss of the year last week with yields increasing across the spectrum as approximately 75% of 2023 gains have been reversed. As widely noted, the Treasury market was experiencing its best start of the year since the late 1980s.
The rising yields are directly impact the NASDAQ as the index has declined about 3% in five days. For the year it is still up about 11.5% however if inflation is stronger than anticipated or if the market sentiment radically changes regarding a pivot, these gains can quickly evaporate.
The economic calendar is comprised of both the PPI and CPI, retail sales several manufacturing surveys, and the Index of Leading Economic Indicators.
Last night the foreign markets were mixed. London was up 0.38%, Paris up 0.71% and Frankfurt up 0.29%. China was up 0.72%, Japan down 0.88% and Hang Seng down 0.12%
Futures are flat amid inflation angst with futures now suggesting a terminal fed funds rate of 5.2% in July rather a “pivot” in June at around current rates. The 10-year is off 2/32 to yield 3.74%.
