Morning Report: More bad inflation news

Vital Statistics:

S&P futures3,976-40.00
Oil (WTI)75.680.23
10 year government bond yield 3.94%
30 year fixed rate mortgage 6.63%

Stocks are lower this morning after another lousy inflation number. Bonds and MBS are down.

Personal Incomes rose 0.6% in January, which was below the 1% street estimate. Personal Consumption Expenditures were robust however, rising 1.8% versus the 1.2% consensus estimate. The increase in consumption was driven by motor vehicles and food services.

The PCE Price Index (the Fed’s preferred inflation measure) rose 0.6%, and the core index (minus food and energy rose the same amount). The Street was looking for 0.4% on both of these, so it another miss. It was also the highest reading since June of 2022. You can see CPI and PCE in the graph below.

So, the CPI, PPI and PCE inflation numbers all rebounded in January. The good news is that consumption remained strong, as did the labor market, so the chance of a hard landing seems remote.

The March Fed Funds futures are now handicapping a 1-in-3 chance for a 50 basis point hike at the March meeting. Note that we will not get the February PCE numbers until after the March meeting, but we will get another look at CPI / PPI.

New Home Sales rose 7.4% MOM to a seasonally-adjusted annual rate of 670,000. This is still down 19% on a year-over-year basis. The median home price was flat on a year-over-year basis to $427,500. The average price fell 5.3% on a YOY basis.

The personal income and outlay number above were confirmed by the University of Michigan Consumer Sentiment Survey. Consumer sentiment rebounded strongly in January, both on a month-over-month basis and an annual basis.

“Consumer sentiment confirmed the preliminary February reading, rising a modest 3% above January. After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 but remains almost 20 points below its historical average. Consumers with larger stock holdings exhibited particularly large increases in sentiment. Overall, February’s reading was supported by a 12% improvement in the short-run economic outlook, while all other index components were essentially unchanged.”

In more bad inflation news, inflationary expectations increased from 3.9% to 4.1%, although longer-term expectations remained at 2.9%. Regardless, January has been awful month for the Fed and its

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