Inflation Hangover

This morning, investors continue to digest the latest mixed data in inflation.

?

Recall on Friday, the PPI was flat in September, a tenth of percentage point less than expected and following a 0.2% rise in August.?Year-over-year, however, the headline PPI gained 1.8%, two-tenths above expectations and up from a 1.7% increase the month prior.?

?

Excluding food and energy costs, the core PPI rose 0.2%, as expected, and 2.8% year-over-year, a notable rise from a 2.4% pace in August and a three-month high.?

?

The day prior, on Thursday, the CPI rose 0.2% in September, a tenth of a percentage point more than expected and following a similar increase in August. Year-over-year, consumer prices rose 2.4%, a tenth of a percentage point more than expected but down from the 2.5% annual increase in August. At 2.4%, this marks the smallest annual gain since February 2021.

?

Food prices rose 0.4%, while energy prices dropped 1.9% in September, the second consecutive month of decline. Excluding food and energy costs, the core CPI rose 0.3% in September, a tenth of a percentage point more than expected and following a similar gain in August. Year-over-year, the core CPI increased 3.3%, also a tenth of a percentage point more than expected and the largest annual gain in three months.

?

In the details of the report, transportation prices fell 0.2%, despite a 0.2% gain in new vehicle prices and a 0.3% rise in used cars and trucks prices. Additionally, airline fares jumped 3.2%, following a 3.9% gain the month prior. Meanwhile, shelter prices rose 0.2% with a 0.3% gain in the OER, down from the 0.5% rise in August. Also, medical care prices rose 0.4%, and other goods and services costs rose 0.2%. ?On the other hand, education and communication prices were flat (0.0%), while recreation prices decreased 0.4%, and commodities prices slipped 0.2% in September.

?

Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.4% in September following a 0.3% rise the month prior. Over the past 12 months, the supercore increased 4.3%, down from the 4.5% annual increase in August and the smallest annual gain in seven months.

?

Bottom Line:?A hotter-than-expected read on both consumer and producer inflation is unwelcomed for the Fed still struggling to reinstate price stability.?As the latest September meeting minutes showed, Committee members are still fearful of upside risk to price pressures, well-founded concerns which clearly materialized in last week’s numbers. Buoyed by a shift in focus towards a presumed cooling in the labor market, the Fed opted for an outsized reduction in policy last month. However, a stellar jobs report coupled with ongoing mixed readings on prices and in some cases, clear indications of accelerating price pressures, suggests the Fed’s focus may be better directed towards inflation, as reinstating the target level of 2% is not a forgone conclusion.?

?

While one data point is never enough to sway the Fed in one direction or the other, with only a handful of key data points between now and the November 7th?meeting, each is viewed with an increased level of importance.?As such, again, further indications of an ongoing solid labor market coupled with still elevated prices will serve to underscore the need for a more tempered and patient approach to rate cuts going forward, increasing the probability of a smaller 25bp rate cut or even allowing the Committee to take a pause and bypass next month's meeting altogether – meaning potentially no adjustment to policy in November – before turning to December, the final meeting of the year.??

?

With a further emphasis back towards inflation, investors appear to be?“recalibrating”?their outlook for rate cuts, reducing expectations for a second-round outsized 50bp cut in November and sending the 10-year back over 4% for the first time since July.?As we long advocated, the disconnect between market expectations and the likely pathway for Fed policy left ample room for market disappointment. However, the adjustment in investors’ expectations – both in terms of size and timing – has been even more notable than anticipated.

?

The 10-year is down 5bps at?4.05% as of 8:54 a.m. ET.

?

In the aftermath of disappointing inflation prints, last week, the latest Fed commentary indicated a heightened level of concern and patience for additional rate cuts. For example, according to Atlanta Fed President Raphael Bostic, bypassing the November meeting is “definitely” an option. Speaking to the WSJ, Bostic said he was “definitely” open to holding rates steady next month. "I think we have the ability to wait and let things play out a little longer... There are elements of the [CPI] report which I think validate that view," he said.

Yesterday, the economic calendar was empty as the bond market was closed due to Columbus Day.

?

This morning, the Empire Manufacturing Index dropped from +11.5 to -11.9 in October, the lowest reading since May. According to the median forecast, the index was expected to decline to +3.9.

?

In the details of the report, prices paid ticked up from 23.2 to 29.0 and prices received rose from 7.4 to 10.8 in October.

Also, the number of employees increased from -5.7 to +4.1, the first positive print following 11 consecutive months of contraction, and the six-month general business conditions index improved from 30.6 to 38.7 in October, the highest reading in three years. On the other hand, new orders fell from +9.4 to -10.2, and inventories declined from a reading of 0.0 to -7.5 in October.

Tomorrow, weekly mortgage applications, along with import and export price indices for September will be released.

?

Later in the week, on Thursday, weekly jobless claims, and a key report of the week – September retail sales. Last month, retail sales surprised to the upside, rising 0.1%. This month, retail sales are expected to rise 0.2%.

?

Also on Thursday, the Philly Fed Business Outlook Index for October, industrial production and capacity utilization, and the NAHB Housing Market Index will also be released.

?

Finally, on Friday, the September housing starts and building permits report. Starts are expected to decline 0.5% in September while permits are expected to drop 1.4% following a 9.6% rise and 4.9% gain, respectively.

?

On the Fed-speak front, we will hear from San Francisco Fed President Mary Daly at 11:30 a.m. ET today, Governor Kugler at 1:05 p.m. ET, and Atlanta Fed President Raphael Bostic at 7:00 p.m. ET this evening.

?

-Lindsey Piegza, Ph.D., Chief Economist