Inflation Week Arrives

Inflation Week Arrives

• It’s a tentative start as Inflation Week arrives. Treasuries are trading slightly lower, and equities are continuing the selling from last Friday. With CPI, PPI, and Import/Export prices, investors will have plenty of inflation news to chew on before the FOMC meeting next week (more on that below). Presently, the 10yr Treasury is yielding 4.09%,  down 2/32nds in price while the 2yr Treasury is yielding 4.52%, down 2/32nd in price.

• Remember that huge beat on January jobs that started the hotter-than-expected data? Well, after revisions jobs gains dipped from 353 thousand to 229 thousand. That’s still a solid result but not the rip-roaring beat that it initially looked like. With the last year being characterized with downward revisions, February’s reported job gain of 275 thousand (beating the 200 thousand expectation) is being taken with a grain of salt. The market is basically saying, “we’ll see how many of those jobs survive the revisions next month.” That and the muted wage gain of 0.1% MoM also contributed to the positive tone in Treasuries after the release. So, with a so-so jobs report in hand, the next big event is tomorrow’s inflation report.

• February CPI is expected to print a 0.4% MoM increase vs. 0.3% in January. Despite the expected monthly uptick, favorable base effects should keep the YoY pace unchanged at 3.1%. The core rate is expected to increase 0.3% vs. 0.4% in January with the YoY rate dipping from 3.9% to 3.7%. The focus will again be drawn to owner’s equivalent rent and whether the long-expected dip in that heavily weighted metric is happening. Core services ex-housing will garner attention too. Recall, in January this so-called super core rate increased 0.85%, the highest in nearly two years. If it prints something close to January it will play into the patient pause tone at the Fed.

• We’ve mentioned before that favorable base effects are in place through May and that should keep the core YoY pace dipping closer to 2-handle territory, assuming the new monthly results are 0.3% or less. After May, base effects become harder to come by with a series of 0.2% and 0.3% prints rolling off in the second half of 2024, so the time is now to see YoY improvement.

• Given the noisy jobs report, Thursday’s February retail sales report will get plenty of attention. Overall sales are expected to increase a solid 0.8% vs. -0.8% in January. Sales ex-autos and gas are expected to increase 0.3% after a disappointing -0.5% drop in January. The control group, a direct feed into GDP, is expected to reverse January’s -0.4% dip with an increase of 0.4%. Thus, it looks like January’s weather-related weakness will be reversed in February.

• There are plenty of other reports this week: PPI, Import/Export prices, University of Michigan sentiment, but the inflation data and retail sales will garner most of the attention and are the last of the big reports before the FOMC meeting next week. With the rate decision looming it means no Fed speak this week. So, the market will be on its own in interpreting results, and the potential monetary policy impact. As we approach the inflation numbers, the futures market is pricing 64% odds of a June rate cut and just over 92bps in cuts for all of 2024.  We’ll see how those odds change with the updated data.

Fed Funds Futures See First Rate Cut in June, with 92bps for all of 2024

Source: Bloomberg