Encouraging December Inflation Data Keeps Prospect of 1H Rate Cut Alive

Yesterday, Fed Governor Christopher Waller noted a fourth-round rate cut in March was not off the table. Seemingly conceding to a likely policy pivot at the start of the year, Waller described the latest inflation data as “good,” and noted that if we “continue getting numbers like this, it’s?reasonable to think rate cuts could happen in the first half of the year.” He went on to say, “I’m optimistic that this disinflationary trend will continue and we’ll get back closer to 2% a little quicker than maybe others are thinking.”

?

Along with Waller, Cleveland Fed President Beth Hammack took a somewhat more cautious tone, noting that inflation, while improved, still remains a problem. In a WSJ interview published today, Hammack said, “We still have an inflation problem. We still have a rate-of-change problem that we need to address."

?

Fed officials will enter their regularly scheduled blackout period starting tomorrow ahead of the January FOMC meeting.

?

The latest Fed comments come on the heels of less concerning December price reports. On Tuesday, the PPI rose 0.2% in December, half the 0.4% gain expected and down from a 0.4% increase the month prior. Year-over-year, producer prices rose 3.3% in December, less than the 3.5% gain expected and up from the 3.0% annual increase in November. At 3.5%, this marks the third consecutive month of an acceleration and the largest annual increase since February 2023.

?

Food prices fell 0.1% following a 2.9% gain the month prior, while energy prices jumped 3.5% in December, the largest monthly increase since February. Thus, excluding food and energy costs, the core PPI was flat (0.0%) in December, down from the 0.2% increase in November. According to the median forecast, the core PPI was expected to rise 0.3% in the final month of 2024. Year-over-year, the core PPI increased 3.5% in December for the second consecutive month, less than the 3.8% increase expected.

?

On Wednesday, the CPI rose 0.4% in December, as expected and an uptick from a 0.3% increase in November. Year-over-year, consumer prices rose 2.9%, also as expected and an acceleration from the 2.7% annual increase the month prior. At 2.9%, this marks the largest annual increase in five months and the third consecutive month of an acceleration from the previous month’s rate.

?

Food prices rose 0.3% and energy prices jumped 2.6% in December, marking the largest monthly gain since August 2023. Excluding food and energy costs, the core CPI rose 0.2% in December, a tenth of a percentage point less than expected and the smallest gain in five months. Year-over-year, the core CPI increased 3.2%, also a tenth of a percentage point less than expected and the smallest annual increase in four months.

?

Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.2% in December, marking the smallest monthly gain since July. Over the past 12 months, the supercore increased 4.2%, down from the 4.3% annual increase in November and marking the smallest annual increase in a year.

?

Bottom Line: A somewhat benign reading in core consumer inflation on Wednesday coupled with a relatively cooler PPI report on Tuesday offers welcome relief for a Fed increasingly concerned about an acceleration in cost pressures. While the December reports do little to arrest the likelihood – and need – for a policy pivot near term given headline prices are still on the rise, the lack of widespread upward momentum affords the Committee more flexibility for policy adjustments going forward as the data continue to evolve in the new year and under a new regime in Washington.?

?

Combined with Waller’s comments, cooler inflation reports pushed yields lower this week.?Down 18bps from Tuesday’s high of 4.79%, the 10-year is currently trading at 4.61% as of 9:48 a.m. ET, the lowest since January 3.?

?

Meanwhile, yesterday, the latest look at the consumer underscored the ongoing resilience in household spending.?Retail sales rose 0.4% in December, falling short of the 0.6% gain expected and following an upwardly revised 0.8% increase in November (revised up from a 0.7% gain initially reported). Year-over-year, retail sales increased 3.9% in December, a two-month low.

?

Car sales rose 0.7% in December following a 3.1% increase the month prior, and gasoline stations sales jumped 1.5% in December following a 0.2% gain the month prior. Excluding autos, retail sales rose 0.4% in the final month of 2024 and climbed 2.9% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.3% in December and increased 3.3% year-over-year, the smallest annual increase since August. Finally, excluding food, autos, building materials and gasoline station sales, control group sales gained 0.7% in December, up from a 0.4% increase in November. Over the past 12 months, control group sales rose 4.1% following a 4.5% annual gain in November and marking a two-month low.

?

In the details of the report, miscellaneous sales jumped 4.3%, furniture sales climbed 2.3%, and clothing sales rose 1.5% in December, the largest increase in eight months. Also, food and beverage sales gained 0.8%, and electronics sales increased 0.4% in December following a 0.9% gain in November. Also, general merchandise sales rose 0.3%, thanks to a 0.1% increase in department store sales and non-store retailer sales ticked up 0.2% in December. On the other hand, health and personal care sales fell 0.2%, and eating and drinking sales slipped 0.3% following a 0.1% gain in November. Also, building materials sales dropped 2.0% in the final month of the fourth quarter, the third consecutive month of decline

?

Bottom Line: Retail sales rose less than expected in December, with topline expenditures falling notably?short of expectations. Despite the headline miss, however, the beat by control group sales which feed directly into the GDP calculation suggest the consumer continues to provide a solid support to growth with still a good amount of spending power. Going forward, while spending may lose some momentum as shoppers continue to bear the brunt of higher prices?and borrowing costs, and at the same time reduce a reliance on credit cards and other “buy now pay later” options, a number of fiscal policy agenda items may help to cushion the average American’s balance sheet in the coming months.?

?

The stronger-than-expected rise in core sales gave a welcome boost to estimates for end of the year growth. According the Atlanta’s GDPNow model, for example, Q4 GDP is expected to rise 3.0%, up from a previous estimate of 2.8% and potentially in line with the 3.1% gain in Q3.?

?

Also yesterday, initial jobless claims rose 14k to 217k in the week ending January 11, a three-week high. The four-week average, however, ticked down slightly from 214k to 213k. Continuing claims, or the total number of Americans claiming ongoing unemployment, on the other hand, declined from 1.88M to 1.86M in the week ending January 4.

?

Additionally, import prices rose 0.1% in December following a similar gain the month prior. According to the median forecast, import prices were expected to decline 0.1%. Export prices, meanwhile, increased 0.3% in the final month of 2024, surpassing the 0.1% increase expected. Over the past 12 months, import prices rose 2.2% and export prices gained 1.8%.

?

Also, the Philly Fed Index jumped from -10.9 to +44.3 in January. According to the median forecast, the index was expected to rise to -5.0. In the details of the report, new orders rose from -3.6 to +42.9, shipments gained from 1.7 to 41.0, and the six-month outlook increased to 46.8 from 33.8 at the start of the year, a two-month high. On the other hand, delivery time fell from 9.2 to 6.8.

?

Business inventories rose 0.1% in November, as expected and marking the largest monthly gain since August.

?

Finally, the NAHB Housing Market Index unexpectedly rose one point to a reading of 47 in January, a nine-month high. According to the median forecast, the index was expected to decline one point to a reading of 45 at the start of the year. ?

?

This morning, housing starts jumped 15.8% in December, pulling the annual pace up from 1.3M to 1.5M, a ten-month high. Starts were expected to rise 3.0%, according to the median forecast on Bloomberg. On a regional basis, starts rose in three of four regions of the country, gaining 40.2% in the Northeast, 20.0% in the Midwest, and 17.7% in the South. Starts fell, however, 0.7% in the West in December. Single family starts increased 3.3%, while multi-family starts soared 61.5% in December following a 30.7% drop the month prior. Year-over-year, housing starts fell 4.4% in December, the fourth consecutive month of an annual decline.

?

Building permits, meanwhile, fell 0.7% in December, less than the 2.2% decline expected and pulling the annual pace down from 1.49M to 1.48M, a two-month low. Single family permits rose 1.6%, while multi-family permits decreased 5.0% in December, the largest monthly decline since July.? Year-over-year, building permits slipped 3.1% in December, the eleventh consecutive annual decline.

??

Also this morning, industrial production rose 0.9% in December, surpassing the 0.3% gain expected. Capacity utilization, meanwhile, increased from 77.0% to 77.6% in December, a four-month high.

?

Next week, the economic calendar is empty on Monday as markets are closed in honor of Martin Luther King Jr. Day.

?

On Tuesday, the Philly Fed Non-Manufacturing Activity Index will be released.

?

Later in the week, on Wednesday, weekly mortgage applications along with the December Leading Index.

?

On Thursday, initial jobless claims and the Kansas City Fed Manufacturing Activity Index for January will be released.

?

Finally, wrapping up the week, on Friday, S&P Global Manufacturing, Services and Composite Indices will be released along with the final December print from the University of Michigan, and existing home sales.

?

-Lindsey Piegza, Ph.D., Chief Economist

?