All Things in Moderation

Vital Statistics:

Stocks are higher this morning despite a stronger-than-expected CPI print. Bonds and MBS are down.

The consumer price index rose 0.4% month-over-month and 3.7% year-over-year, which was a touch above Street expectations. The core rate, which excludes food and energy, rose 0.3% MOM and 4.1% YOY, which was in line with expectations.

“US Core inflation came in line while headline measures were higher than consensus forecasts,” Mohamed El-Erian stated. “Together with relatively low weekly jobless claims of 209,000, the immediate market impact will be some upward pressures on market yields. Analytically, it is a reminder of the challenges of the ‘final mile’ of battling inflation, especially when core service inflation remains high and there is concern about the spillover into core CPI from higher energy prices.”

Shelter was the biggest contributor to the increase, with gasoline close behind. Shelter inflation rose 0.6% MOM and 7.2% YOY, the biggest increase since May. The shelter component presents a problem for the Fed in that prices are being driven by super-low supply, and I don’t see how an additional 25 basis points on the Fed Funds rate can affect that. The only thing that can fix the shelter issue is more homebuilding.

Other big increases in inflation include auto insurance (+18.9%), auto repair (+10%), transportation (+9.1%), and food away from home (+6%).

The labor market remains resilient, with only 209,000 initial unemployment claims. Separately, the United Auto Workers is extending its strike to a Ford truck plant in Kentucky.

The FOMC minutes were released yesterday. “A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted….Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided….Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening.”

Bond yields generally worked their way lower after the FOMC minutes. The Fed Funds futures took down their bets on a November tightening to below 10% and while the probability of a tightening by the December meeting remained around 26%.

The minutes mentioned that bank credit was tightening somewhat: Bank credit conditions appeared to tighten somewhat over the intermeeting period, but credit to businesses and households remained generally accessible. Check out the YOY change in bank credit, seems a bit more than just “tightening somewhat.” – first YOY decline since the Great Recession.

One explanation is that everyone over-borrowed when rates were 0% and don’t need to borrow now that rates have increased. Or it could mean that the problems in commercial real estate are beginning to affect the supply of credit.

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Earnings season kicks off tomorrow with the big banks reporting. Expect to see continued pressure in the regional banking space. “The acute phase of bank stress is clearly over, but in its wake several challenges have become exacerbated including funding challenges, balance sheet constraints, dampened loan demand, and potential negative credit migration as commercial real estate (CRE)] maturities are dealt with,” Wedbush analyst David Chiaverini wrote in a note. “We expect another underwhelming quarter for banks given the macro backdrop.”

Filed under: Economy |