All Things in Moderation

Vital Statistics:

Stocks are higher this morning after the consumer price index came in lower than expected. Bonds and MBS are up.

The consumer price index rose 0.4% MOM in October, according to the Bureau of Labor Statistics. On an annual basis prices rose 7.7%. The core rate of inflation (stripping out food and energy) rose 0.3% MOM and 6.3% YOY.

About half of the increase in CPI was due to shelter. Insurance, new vehicles and recreation were also contributors on the plus side. Used cars, medical care, airline fares and apparel were negative contributors. The year-over-year increase in the headline number was the lowest since January 2022.

It does look like we are beginning to trend downward in the overall month-over-month changes which is good news. Of course one data point isn’t going to change the Fed’s thinking all that much, but I suspect this puts to rest the steady diet of 75 basis point increases in the Fed Funds rate.

The initial reaction in the Fed Funds futures market is to increase the chances of a 50 basis point hike next month to 80% versus 58% yesterday.

The December 2023 Fed Funds futures are now circling around an end of year Fed Funds rate of 4.5% – 4.75%. This would mean that maybe we get 50 basis points next month, and then another 25 in early 2023. The thing I wonder about is shelter, since it can be persistent. If we look into next year and most inflation is back to normal with the exception of shelter, does the Fed still maintain a tight policy stance? Much of the shelter component is owner-equivalent rent which isn’t a “cost” in that it isn’t something you write a check for, at least if you are a homeowner. It is more or less an abstract concept.

The inflation print caused the 10 year bond yield to drop about 20 basis points, and put about 100 points on the S&P 500 futures. I wonder if the bond market reaction was due to a lot of people leaning short after the lousy 10 year auction yesterday. We will have some Fed-speak later this morning (luckily not Neel Kashkari) so it will be interesting to hear what Mary Daly says about the CPI reading. Don’t forget the bond market is closed tomorrow.

Initial jobless claims rose to 225k last week. So far, the labor market is holding up, notwithstanding the parade of job cuts in the real estate industry.

Redfin has closed down its home flipping unit and laid off 13% of its staff. Both Opendoor and Zillow have struggled to make money monetizing their proprietary real estate valuation models by making bets in the real estate market. It is a capital-intensive business, and I suspect the special sauce is not the gee-whiz cool valuation models, but blocking and tackling – managing properties, doing fixes, and moving the merchandise. Don’t forget that rising rates have increased the carrying cost of these properties as well. Redfin hopes to liquidate its portfolio by the end of the year.

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