October CPI Reveals Price Pressures Remain Elusive

Nov 14, 2018

Equities tried to mount a recovery yesterday following Monday’s bloodbath but the collapsing oil market proved too much and both equities and oil moved lower with the latter hitting a twelve-month low. The fall in oil began in October and has now declined by 27% in the last month as increasing supplies and worries over global growth weigh on the market. The 7.1% decline yesterday was the biggest one-day drop in three years. The October CPI report is out this morning and mostly in line with expectations (more on that below). In the report energy costs actually increased but if the bulk of the oil collapse holds those results will be  felt in November’s numbers and likely for months to come.   For now the Fed continues to talk up the economy and expresses confidence in inflation approaching its 2% benchmark. Fed Chair Jerome Powell will speak on the economy this evening after the market closes so we’ll be on the lookout for any new concerns stemming from the downward moves in stocks and oil.  Presently, the 10-year note is off 2/32nds in price to yield 3.15%, comfortably in the middle of the recent 3.05% - 3.25% range and today’s CPI numbers are not likely to shift that range.


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While the Fed doesn’t need inflation to move higher to rationalize further rate hikes, it would give them another pillar on which to support rate hikes in 2019 and beyond, and in that regard the results will leave the Fed wanting more.  October’s CPI numbers mostly met expectations with core CPI gaining 0.2% month-over-month while year-over-year printed below expectations at 2.1% versus 2.2% consensus.  The near-term trend is headed lower as the 3-month annualized core CPI rate dropped to 1.6% - the lowest in fourteen months and decidedly under the Fed’s 2% target/benchmark.


As for headline CPI the 0.3% gain matched expectations as a rebound in housing and energy expenses  drove the bulk of the increase, but both are unlikely to hold in future months.  Treasuries are treating the mostly benign numbers with a collective shrug.  Despite the muted Treasury response the latest CPI release is further confirmation that the expected (hoped for?) late-cycle spike in inflation due to a 50-year low in unemployment remains elusive. The Phillips Curve proponents on the Fed, of which there are many, will have to wait another month to see if demand-pull inflation readings start to appear, because at this point they are not. Even increases in wholesale prices from the recent PPI release appear not to be filtering into retail prices.


Combing through the details of the core CPI number, Owners Equivalent Rent and the other housing-related inputs was the key sector keeping core-inflation from having back-to-back 0.1% prints.   Housing expenses (which includes owners equivalent rent) rose 0.3% after a soft 0.1% gain in September. And with a nearly 42% weighting in the index it has been driving the core rate increases of late.  With housing activity moderating these strong monthly gains in housing expenses seem unlikely to hold.


As mentioned if the dramatic decline in oil holds it will start to filter into lower energy costs in November and beyond acting as another headwind for those on the Fed looking for inflation to trend towards their 2% target. The Fed’s preferred inflation metric: core PCE typically runs about 30bps below core CPI so the 2.1% YoY print for October implies a 1.8% reading in core PCE in the coming months. If sub 2% readings persist  the Fed will have to concoct other excuses for quarterly rate hikes rather than to “ensure price stability.” We’ve mentioned before that the rate hikes this year were relatively easy to engineer but next year each hike will become successively more difficult and this report will only add to that difficulty.


Despite the near expected inflation readings, the levels (both core and overall) hovering just over 2% are keeping real earnings from showing anything more than minimal gains. Real Average Hourly Earnings increased 0.7% year-over-year versus 0.5% in September due mostly to the recent decline in YoY CPI from high-2% to mid-2% levels. For the month real average hourly earnings fell 0.1%, the first decline since February and a sign that recent nominal wage gains are barely keeping up with inflation, if that.


While a  +0.7% YoY gain in real spending power is better than the near unchanged levels in prior months, the negative result in October doesn't bode well for future gains in consumer consumption.  That fact alone is yet another reason to believe that each successive rate hike in 2019 will become more difficult to accomplish if nominal wage gains don’t accelerate beyond the current trend of 2.8% to 3.1% YoY gains. If the expected pick-up in nominal wage gains doesn’t occur it’s easy to see consumption starting to falter under the weight of greater borrowing costs.




Market Update  Oil in Bear Market and Touches a Yearly Low


The collapse in the oil market has been sudden and unrelenting over the last month. After touching a 52-week high on October 3rd, oil has tumbled by 27% as the combination of increasing supplies meets concern over slowing global growth. The combination has oil at a yearly low and the price decline will surely weigh on future CPI numbers as the dramatic price move gets picked up in the November report. With inflation trending modestly lower over the past few months this collapse in oil not only signals a widening of deflationary forces but also speaks to concern over the  health of the global economy. While the U.S. continues to report solid economic numbers the global oil market is definitely flashing a warning signal about markets far and wide.

Oil in Bear Market and Touches a Yearly Low



Agency Indications Agency Indications — FNMA / FHLMC Callable Rates


Agency Indications — FNMA / FHLMC Callable Rates



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