CPI and Initial Claims Data Produce some Surprises

The wait is over. The December Consumer Price Index (CPI) was released this morning and it was a little hotter than expected.

Briefly, total CPI was up 0.3% month-over-month in December (Briefing.com consensus 0.2%) following an unrevised 0.1% increase in November. Core CPI, which excludes food and energy, was also up 0.3% month-over-month (Briefing.com consensus 0.2%). The shelter index jumped 0.5% and accounted for over half of the monthly increase in total CPI.

With these December changes, total CPI was up 3.4% year-over-year, versus 3.1% in November, and core CPI was up 3.9% year-over-year, versus 4.0% in November.

The key takeaway from the report is that inflation, while improved, has lost some of its downward momentum. Therefore, the Fed isn’t likely to be in a rush to cut interest rates — at least not yet based on this latest CPI reading.

That same thinking also comes into play with the weekly initial jobless claims and continuing jobless claims data.

Initial claims for the week ending January 6 decreased by 1,000 to 202,000 (Briefing.com consensus 209,000). Continuing jobless claims for the week ending December 30 decreased by 34,000 to 1.834 million.

The key takeaway from the report is the recognition that employers, in general, are still reluctant to cut employees from payrolls. That is a positive consideration as it relates to the outlook for labor and the economy, which means it may not be a positive consideration as it relates to the market’s outlook for rate cuts.

Following the release of this morning’s data, Treasury yields moved higher and equity futures moved lower. The 2-yr note yield, at 4.32% in front of the release, is at 4.38% now, and the 10-yr note yield, at 3.98% in front of the release, is at 4.06% now.

Those aren’t big spikes relative to yesterday’s settlement levels. In fact, the yield for the 2-yr note is up two basis points, and yield for the 10-yr note is up three basis points, from yesterday’s settlement. A mitigating factor perhaps is a deeper look into the CPI report, which reveals a friendlier 2.2% year-over-year increase in the all items index less food, shelter, and energy.

Currently, the S&P 500 futures are down 12 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 22 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 83 points and are trading 0.2% below fair value.

Again, those readings aren’t a picture of true shock or disappointment. They strike us more as a recognition of knowing that the element of a negative headline surprise with this report was higher than the element of a positive surprise. They might also suggest that the market continues to believe that the inflation data will go its way and the Fed’s way in coming months.

In any case, the market will have to contend with the “will they cut in March or won’t they” question, which is apt to drive some choppy trading conditions. According to the CME FedWatch Tool, the probability of a 25 basis points cut in the target range for the fed funds rate at the March meeting is at 63.0% now versus 67.4% yesterday.

Today’s data and “that question” have partly overshadowed the other big market news of the morning, which came late yesterday in the SEC’s approval of 11 spot Bitcoin ETFs. It remains to be seen how that will impact trading behavior today, but there is no doubt that the approval is a watershed moment for Bitcoin enthusiasts.

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Originally Posted January 11, 2024 – CPI and initial claims data produce some surprises