Every so often we get a “must-watch” or “eagerly anticipated” economic report. This morning’s CPI was one of them. January’s month-on-month numbers were as expected, with rises of 0.5% and 0.4% on the headline and core results, respectively. The December figures were revised higher, however, with the core going up from 0.3% to 0.4% and the headline going positive, from -0.1% to +0.1%.
That would seem to quash the disinflationary narrative for the time being, but thanks to a statistical quirk, it can still be said that inflation is slowing. On a year-on-year basis, headline CPI fell from 6.5% to 6.4%, which was above the expected 6.2%, thanks to the aforementioned revisions. The year-on-year number is the most widely reported, so we can expect non-financial media to report – factually – that inflation fell in January. The White House did this already, putting out a press release with the lede: “Inflation in America is continuing to come down…”. In a media appearance yesterday (around the 2:00 mark), I noted that this was likely to be the case.
It is important to remember why we need to focus more on the monthly rather than the yearly data. It’s something we discussed at length in August. The crux of the linked piece is that annual data contain 11 months of old data and one month of new data. Each month, the current data point replaces the one from a year ago. Last January’s month-on-month CPI was 0.6%. (Kind of makes you wonder what the Fed was thinking at that time, no?) Since the other 11 months of data remain the same, we see the annual figure decline by 0.1% because the year-ago data point was 0.1% higher.
Yet we’re all supposed to be following a data-dependent Fed. If they weren’t reacting to data released a year ago, why should we let that enter our thinking now? Markets were enamored with last month’s quiescent CPI report that seemed to bolster Chair Powell’s “disinflation” assertion. It seems hard to keep that infatuation with today’s Valentine’s Day report.
When it comes to interpreting economic data, I tend to believe that the bond market gets it right more often than the stock market. Stocks get distracted by stories, momentum and all sorts of extraneous ideas. Treasury note and bond traders have little to concern themselves besides inflation and monetary policy. Someone pointed out to me that Nvidia (NVDA) bounced almost 4.5% shortly after its initial 1.8% drop. If you’ve been buying NVDA on the promise that it will benefit from the widespread adoption of AI, today’s CPI report matters little – at least in the short-term. Conversely, the potential long-term promise of AI has virtually no bearing on short-term interest rates. It’s pretty much only about Fed policy.
After a brief head-fake in the initial aftermath of the 8:30 EST report, bond yields rose steadily and sharply. We now see 2-year rates at 4.61%, up 9 basis points, and up 19 from the base of their initial spike lower. We also see Fed Funds futures pricing in a higher peak rate in July – 5.27% vs. yesterday’s 5.20% and less potential for aggressive cuts by next year. The assumption for January is now 4.88% vs. yesterday’s 4.73%.
As we have noted various times, if safe assets are getting clobbered, risk assets don’t stand a chance. But that’s over the long-term. In the short-term, risk assets can and often do what they please. But over time, it is hard to buck a receding monetary tide. Today’s inflation report does nothing to make us think that the tide will be rising anytime soon.
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