A week’s worth of movement — nay, a month’s worth or perhaps even a year’s worth or several years worth of movement — was seen in the Treasury market and certain bank stocks ahead of the 8:30 a.m. ET release of the February Consumer Price Index.
To wit: the 2-yr note yield was up as many as 28 basis points to 4.30%, the 10-yr note yield was up as many as 11 basis points to 3.63%, shares of First Republic Bank (FRC) were up more than 50%, and shares of PacWest Bancorp (PACW) were up close to 40% as were shares of Western Alliance Bancorporation (WAL).
Why? The simple answer is, because the moves ahead of those moves had been so extreme. From their highs last Wednesday, the 2-yr note yield had plunged as many as 124 basis points to 3.82%, the 10-yr note yield had fallen as many as 54 basis points to 3.47%, and shares of FRC, PACW, and WAL had cratered as much as 85%, 82%, and 90%, respectively.
Said another way, Treasuries were overbought and stocks, namely bank stocks, were oversold on a short-term basis. That recognition gave way to some opportunistic trading activity driven by the belief that there would at least be some short-term swings in the opposite direction.
Hence, big swings were happening even without the benefit of knowing what the February Consumer Price Index would show.
What everyone knows now is that total CPI was up 0.4% month-over-month in February, as expected, and up 6.0% year-over-year — the smallest 12-month increase since September 2021 — versus up 6.4% in January. Core CPI, which excludes food and energy, was up 0.5% month-over-month (Briefing.com consensus +0.4%) and up 5.5% year-over-year — the smallest 12-month increase since December 2021 — versus up 5.6% in January.
The breakdown of the report, however, had its share of eyebrow-raising inflation figures. The shelter index was up 0.8% month-over-month (vs up 0.7% in January), the transportation services index was up 1.1% month-over-month (vs up 0.9% in January), and the used cars and trucks index was down 2.8% month-over-month (vs down 1.9% in January), which was nowhere close to the indication in the Manheim Index that indicated used car prices were up 4.3% month-over-month in February.
Additionally, services inflation was up 7.6% year-over-year, unchanged from January, and services inflation less rent of shelter was up 6.9% year-over-year, versus 7.2% in January, while services inflation less medical care services was up 8.3% year-over-year, versus 8.2% in January. Meanwhile, services inflation less food, shelter, and energy was up 3.7% year-over-year, versus up 4.0% in January.
The key takeaway from the report is that it continues to show inflation running well above the Fed’s 2.0% inflation target. While the banking problems have taken a 50 basis points rate increase off the table at the March FOMC meeting, this report should ensure that the Fed raises rates by 25 basis points, unless it wants to send a message that the banking problem is a bigger issue than people think by not raising rates only a few weeks after the Fed Chair teased the possibility of a 50 basis points rate hike at the March meeting.
The fed funds futures market seems to agree with the latter assumption. It shows a 91.5% probability now of a 25 basis points rate hike (versus 76% before the release).
In general, the equity market appears placated for now by the understanding that today’s CPI report wasn’t much worse than expected, by the hope that the banking problems won’t be as bad as feared, and the realization that market rates, while up this morning, are much lower still than they were last week.
Currently, the S&P 500 futures are up 46 points and are trading 1.1% above fair value, the Nasdaq 100 futures are up 133 points and are trading 1.0% above fair value, and the Dow Jones Industrial Average futures are up 331 points and are trading 0.9% above fair value.
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Originally Posted March 14, 2023 – Rates and bank stocks turn in opposite directions while inflation holds pretty steady
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