December’s CPI was greater than expected thus suggesting the road to a 2% inflation rate is bumpy and the last mile could be difficult.
December’s headline CPI rose 0.3% (vs. 0.2% prior), higher than the consensus expectations with the year over year change rising to 3.4% (vs. 3.1% prior). Core inflation remained at 0.3%, also higher than the 0.2% consensus view. The year-over-year pace of core inflation fell to 3.9% from 4.0% but is still almost double the prescribed speed limit.
The one, three- and six-months annualized basis—the metric Fed officials use to gauge inflation momentum—core CPI rose 3.9%, 3.3% and 3.2%, respectively vs. November’s corresponding readings of 3.5%, 3.4% and 2.9%.
The immediate conclusion is that a March reduction will not occur, and inflation is remaining stubbornly high in the face of the most aggressive Fed in history. However, the market is still convinced the Fed will ease six times in 2024, falling under the guise of “more will occur later.” The Fed’s dot plot suggests three interest rate cuts.
At the close, equites were essentially unchanged. Long dated moved nominally lower. unchanged.
The narrative is rising around the geopolitical complacency even as Middle East tensions are at levels not experienced in years. Iran seized an oil tanker and the Houthis promised “a big response” if the US retaliates for the largest drone attack, a retaliation that many are now suggesting will occur,
The VIX or fear gauge is around all time lows. Wow!
Will there be a sudden spike in inflationary expectations on increased shipping costs? Will oil gap higher as been the historical reaction to rising Middle East tensions which will also impact inflation?
Today is the commencement of fourth quarter earnings season as several bulge bracket firms post results. Most will concentrate on any increase in non-performing assets and any subsequent increase in loan loss reserves (LLR). Large increases in LLR are like kryptonite for bank earnings and capitalization which in turn impacts monetary velocity and economic activity.
Also released today is the PPI. What will it suggest?
Last night the foreign markets were mixed. London was up 0.58%, Paris up 0.71% and Frankfurt up 0.53%. China was down 0.16%, Japan up 1.50% and Hang Seng down 0.35%.
Futures are down about 0.4% ahead of the bulge bracket financials earnings report and the PPI. Oil is up about 4% following the US bombing of Yemenis targets. The 10-year is off 9/32to yield 4.01%.
