Equites staged moderate gains ahead of September’s CPI which is released this morning at 8:30. Analysts are expecting a 0.1% monthly increase and a 2.3% annualized jump, slightly lower than August’s levels. The core CPI is expected to rise by 0.2% and 3.2% year over year, the same increase as last month.
Writing the obvious, the CPI is considerably lower than the 9% rate two years ago but it has remained around current levels for the past six months. The rate of change has slowed but prices are still considerably higher than three years ago for a myriad of reasons.
Fed swaps are currently pricing approximately 21 bps of rate cut premium into the November 7 policy meeting and a combined 50-bps of rate cuts over the two remaining meetings this year. Prior to the payrolls number, a 50-bps reduction at the November meeting was fully priced in.
The Minutes from the recent FOMC meeting were released yesterday. Forecasts that were published about how much the Committee should cut interest rates by year’s end. Seven officials preferred 75 bps of easing in 2024, while two preferred just 50 bps. Ten policy makers penciled in a percentage point or more of reductions.
Perhaps of significance was the lack of clarity on the so-called neural rate—a level of borrowing costs that neither stimulates nor restrains economy. While the range has increased during the past several quarters, individual policy makers’ forecasts ranged from 2.4% to 3.8%,
If the range is closer to 3.8%, the long end of the bond market is considerably overvalued, meaning that longer-term yields should rise.
Equites were relatively unmoved by the Minutes.
Treasuries sold off across the curve on the combination of the Minutes, a weak ten-year Treasury auction and fears about today’s CPI.
What will happen today? How will the data be interpreted? Moreover, third quarter earnings season commences tomorrow. Bloomberg reports that profits for the S & P 500 are projected to increase by 4.7%, down from the 7.9% projected growth on July 12.
Last night the foreign markets were mixed. London was down 0.30%, Paris down 0.29% and Frankfurt down 0.14%. China was up 1.32%, Japan up 0.26% and Hang Seng up 2.98%.
Dow and NASDAQ futures are down 0.15% and 0.25%, respectively ahead of the CPI. At this juncture, the hurricane is not affecting market sentiment.
The 10-year is off 4/32 to yield 4.09%. The two-year Treasury or instrument most sensitive to monetary policy is at a 4.04% yield, up from a 3.52% yield just prior to the Fed lowering the overnight rate by 50 bps.
