“The supreme art of war is to subdue the enemy without fighting.”
-Sun Tzu
The battle of the Fed versus inflation has been ongoing for more than a year. This afternoon we will get the latest update on the Fed's battle plan against this timeless enemy.
It should be clear by now that the Fed likely isn’t going to leave the battlefield just yet. In fact, with yesterday’s CPI report the probability of an interest rate cut in Q1 2024 has been pushed into Q2. While not a big change in the whole scheme of rate policy, it is an incremental hawkish shift.
CPI this cycle peaked at +9.1% Y/Y in the June 2022 report. Since then, it has been generally a steady decrease to yesterday’s +3.1% Y/Y report for Headline CPI. Although, we did get a little bit of a reacceleration from July into October of this year and risk assets didn’t like that . . .
This next phase of the fight on inflation may well resemble the trench warfare of World War I. In those battles, the best-case scenario for the victor was often the line moving by some 10 miles. Then the next battle would push the line back the other direction. And on and on it went.
Much to the chagrin of those hoping for a rapid series of rate cuts in 2024, the recent employment data isn’t helping the case. While it isn’t all puppy dogs and rainbows in the labor market, it is certainly not all bad news. In fact, November Non-Farm Payrolls accelerated, weekly jobless claims remained pinned down at just over +200K, and the unemployment rate dropped back down to +3.7%.
With the economy and labor market remain strong and the inflation still percolating (more on that below) . . . it seems unlikely that the Chairman Powell will announce “Mission Accomplished” tomorrow and take his fiscal soldiers off the economic battlefield.
Back to the Global Macro Grind...
As my colleague Christian Drake noted, yesterday’s CPI report had a little for everyone. The report was some combination of unchanged, accelerating, or decelerating. To some extent, it depends what you wanted to see.
On a Headline basis, CPI decelerated by 10bps to +3.14% Y/Y. Meanwhile on a Core basis, CPI was flat at +4.0%. Finally, the hawks even got their data with an acceleration in Core Services Ex-Shelter, which accelerated by 23bps to +4.1% Y/Y.
While Core Services Ex-Shelter seems like an unusual way to look at inflation, it is actually one of the preferred measures for the Fed. In theory, this makes sense as this measure does strip out more commodity-based measures and this tends to look at more intrinsic, non-cyclical inflation. The Chart of the Day highlights this re-acceleration.
One thing we can probably all agree on is that the combination of recent employment and yesterday’s CPI report is not dovish. If the FOMC’s analysis is at all data based, they will likely come to the same conclusion today.
You also might recall that it was just over a month ago when Powell said that he and his colleagues remain steadfast in getting policy in line with their 2% inflation goal, but “we are not confident that we have achieved such a stance.” A month later, we are not so sure they have either.
Ahead of the Fed’s decision today, we will get one more important data point in the U.S., in the way of November PPI. Currently, consensus expects a monthly acceleration in both Headline and Core PPI. This is more of a commodity-based measure of inflation, so could come in softer than expected . . . just to confuse matters even more.
The BoE and ECB later may have less of a dilemma when contemplating when to shift to more dovish policy. The economic data from the U.K. and the Eurozone at large continues to be soft. Specifically, this morning we have a few key economic updates:
- October U.K. Construction output slowed to +1.1% Y/Y, versus +2.8% in September and was below consensus;
- October U.K. Industrial Production slowed to +0.4%, versus +1.5% in the prior month;
- U.K. GDP for the three months ending in October was basically flat versus the prior three-month period; and
- Finally, Eurozone October Industrial Production came in well below expectations at -6.6% Y/Y.
Clearly, this is October data, but it doesn’t bode well for aggregate economic activity heading for Q4. But with some European indices approaching YTD highs, clearly the signal from the likes of industrial production at a 3-year low is . . . buy stocks!
As we get through the next few days of data and global central banking decision makers, we get to options expiration on Friday. According to our partners at Tier1 Alpha this morning:
“The market is currently on track for the largest option expiration on record this Friday, with a staggering 3.1 trillion in notional Open Interest scheduled to either expire or be rolled into the new year.
And ever, as they say, is a long time.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.13-4.53% (bearish)
UST 10yr Yield 4.07-4.37% (bearish)
UST 2yr Yield 4.55-4.86% (bearish)
High Yield (HYG) 74.83-76.20 (bearish)
SPX 4 (neutral)
NASDAQ 14,067-14,572 (bullish)
RUT 1 (bearish)
Tech (XLK) 181-190 (bullish)
Energy (XLE) 79.85-84.03 (bearish)
Utilities (XLU) 62.18-64.26 (bullish)
Shanghai Comp 2 (bearish)
BSE Sensex (India) 67,280-71,022 (bullish)
VIX 12.01-15.25 (neutral)
USD 103.04-104.50 (bullish)
GBP/USD 1.248-1.272 (bullish)
CAD/USD 0.732-0.741 (neutral)
Oil (WTI) 67.01-75.14 (bearish)
Nat Gas 2.21-2.71 (bearish)
Gold 1 (bullish)
Silver 22.19-25.86 (neutral)
Uranium (URA) 28.14-29.59 (bullish)
Bitcoin 40,374-45,528 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
