KBND - Weekly Commentary: Inflationary Biases

2024-02-17 05:13:05 ET

Summary

• January's CPI data confirm that inflation is anything but dead and buried.
• It's worth noting that despite January's notable 0.8% rise, Import Prices were still down 1.3% YOY.
• Medical Care Services gained 0.7%, with Health Insurance prices jumping 1.4% during the month.

It was an illuminating week, especially Tuesday. January's CPI data confirm that inflation is anything but dead and buried. Headline inflation rose 0.3% for the month versus the 0.2% expected. Year-over-year headline inflation was 3.1% compared to expectations of 2.9%. Core (ex-food and energy) CPI rose stronger than expected, with one-year inflation at 3.9%. "The devil is in the details" is apt.

It's worth noting that despite January's notable 0.8% rise, Import Prices (from Thursday data) were still down 1.3% y-o-y. Disinflationary forces in China and elsewhere have supported waning goods price inflation here at home. In Tuesday's CPI data, January Core Goods Prices declined 0.3%. Importantly, however, inflationary forces remain formidable throughout Services pricing.

In data that should have the Fed on edge, monthly Core Services Inflation jumped to 0.7% from 0.4%. "Supercore" (Services excluding shelter) inflation accelerated in January to a 21-month high 0.8%. Shelter prices rose to 0.6% from 0.4%, with 6.0% y-o-y inflation. Medical Care Services gained 0.7%, with Health Insurance prices jumping 1.4% during the month. Resurgent health services inflation would not be surprising. Transportation Services jumped 1.0% for the month, led by Maintenance and Repairs up 0.8% (6.5% y-o-y) and Insurance rising 1.4% (20.6% y-o-y).

From Bloomberg Intelligence (Anna Wong and Stuart Paul): "If Fed officials were hoping to see a broadening of the disinflation process in the January CPI report, their wish didn't come true. The share of core spending categories experiencing outright monthly deflation declined to 29% from 44% prior. The share experiencing modest annualized inflation of 0.0%-2.0% fell to just 6% from 11% prior. The share of categories with annualized monthly inflation between 2.0%-4.0% held roughly steady at 7%. And the share of spending categories with annualized monthly inflation of 4.0% or more jumped to 58% from 38% prior."

Understandably, the bond market didn't take kindly to stronger and broadening inflation. Ten-year Treasury yields jumped from 4.15% to 4.28% on the data release, ending Tuesday's session at an 11-week high 4.32%. Two-year yields surged 18 bps Tuesday to 4.66% (high since December 12th). After beginning the week pricing a likely (76% probability) cut at the Fed's May 1st meeting, by week's end it was unlikely (36%). Markets now expect a 4.43% Fed funds rate (90bps of cuts) for the December 18th meeting, 23 bps higher for the week and up 78 bps from the January 12th low. Volatile MBS yields surged 25 bps Tuesday to a 12-week high 5.91% (ending week at 5.88%).

Equities were under heavy selling pressure. At inter-day Tuesday lows, the S&P500 was down 2.0%, and the Nasdaq100 was 2.25% lower. Selling was more intense for the broader market. The small cap Russell 2000 was down as much as 4.6%, before ending Tuesday's session 4.0% lower (biggest one-day loss since June '22)....

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