All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	3,985	-2.75
Oil (WTI)	78.60	1.24
10 year government bond yield		3.47%
30 year fixed rate mortgage		6.24%

Stocks are lower this morning despite a positive CPI report. Bonds and MBS are up.

Consumer prices fell 0.1% in December, according to the Consumer Price Index. They rose 6.5% on an annual basis. The core rate, which excludes food and energy rose 0.3%. The decrease in the headline rate was due mainly to falling gasoline prices. The core rate did increase from November, however that was due primarily to housing. The trend overall has been down, which should be good news for the Fed, with emphasis on the should. I did a deep dive over the weekend why the action we are seeing in the CPI is a necessary, but not sufficient, condition for the Fed to stop tightening.

Bonds definitely liked the data however, with the 10 year bond yield falling below 3.5%.

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Initial jobless claims came in at 205,000, which is still exceptionally low by historical standards.

Philly Fed President Harker said that the era of aggressive rate hikes are over and it will probably make sense to increase in smaller, 25 basis point increments. “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Harker said in the text of a speech. “In my view, hikes of 25 basis points will be appropriate going forward.”

If “a few more times” = three more hikes, then we will be looking at a range of 5% – 5.25% by the May meeting. This would comport with the end-of-year forecast by the Fed in December.

Note the Fed Funds futures are still more dovish than the Fed.

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Filed under: Economy |