Yesterday’s weakness was attributed in part to some nervousness in front of today’s release of the Consumer Price Index for August. Well, that report is out and what it showed is that there was legitimate reason to be a little nervousness in front of it.
Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (Briefing.com consensus 0.2%).
On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed’s 2.0% target, reflecting a sticky quality that probably won’t compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a “higher for longer” mindset.
According to the CME FedWatch Tool, the probability of a 25 basis points rate hike at the November FOMC meeting is at 43.3% versus 44.2% yesterday.
There was some knee-jerk selling interest in the equity futures market and Treasury market immediately after the report’s release, but things have settled down some since then.
Currently, the S&P 500 futures are up four points and are trading 0.1% above fair value, the Nasdaq 100 futures are up six points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 24 points and are trading 0.1% above fair value.
The 2-yr note yield, which traded as high as 5.07% after the CPI report, is back down to 5.00%, unchanged from yesterday. The 10-yr note yield, which jumped to 4.34%, is at 4.29%, up three basis points from yesterday.
Where things go from here in the Treasury market is important for where things go from here in the stock market.
Rising rates are a headwind for equities, which are also contending this morning with Q3 warnings from American Airlines (AAL), Spirit Airlines (SAVE), and Frontier Group (ULCC) that were attributed in part to higher costs, a JPMorgan downgrade of Oracle (ORCL) to Neutral from Overweight after the stock’s big drop yesterday, and a report that mortgage applications hit their lowest level since 1996.
Meanwhile, oil prices remain elevated at $89.19 per barrel, up 0.4%, and continue to be a focal point of concern as it relates to inflation expectations, profit margin pressure, and a slowdown in discretionary spending.
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Originally Posted September 13, 2023 – Keeping a close eye on Treasuries after CPI report
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