Treasury Prices Lift as December CPI Awaits on Thursday

Treasury Prices Lift as December CPI Awaits on Thursday

• Treasuries open the week in the green as some of the luster of the jobs report has dimmed, but upcoming supply and CPI looming on Thursday could keep a lid on rallies. The Treasury will sell $52 billion of 3yr notes on Tuesday and $37 billion of 10yr notes on Wednesday. Presently, the 10yr Treasury is yielding 4.02%, up 7/32nds in price and the 2yr Treasury is yielding 4.36%, up 1/32^nd on the day.

• The post-mortem on the jobs report will continue this week until we get to the CPI report on Thursday (more on that below). As we mentioned on Friday, while the headline job growth number beat expectations there was enough noise in the report to give one pause that perhaps the strength wasn’t what it seemed. The most obvious glitch is the consistent downward revisions in 2023 to the initial numbers. In fact, July was the only month not revised lower than the initial print in 2023 and with private payrolls it was 12-for-12 in downward revisions.

• The three-month average for job gains is down to 165 thousand, and that includes the December print of 216 thousand, which seems likely to be revised lower if it follows 2023 precedent. The three-month average for private payrolls is down to 115 thousand. So, not recessionary but certainly less than robust, and bears watching closely in the months ahead.

• As mentioned above, the key report this week will be the December CPI numbers due on Thursday. Overall inflation is expected to increase 0.2% MoM vs. 0.1% in November with the YoY ticking up to 3.2% vs. 3.1% in November. Core CPI is expected to increase 0.3% matching the November increase but the YoY pace is expected dip two-tenths from 4.0% to 3.8%. For the next six months, including December, the MoM numbers rolling off the YoY calculation are 0.4%, or higher, so as long as we’re seeing something less in the new prints the YoY pace should continue moving lower through the first half of this year. After June, the base effects become more challenging which could bring back the stickiness topic again.

• PPI numbers follow on Friday and are expected to be up slightly from November’s, as the disinflationary trend in wholesale prices appears to be waning. We’ve discussed before the lagging nature of CPI improvement compared to wholesale as end-sellers try to hold onto the pricing power they gained in 2021 and 2022. So, there is still some previously lower wholesale pricing that can be passed through to consumers, but it looks like that window could be closing in the second or third quarter which implies, along with the base effects mentioned above, that second-half 2024 inflation improvement will be more challenging.

• Finally, one of the items picked up in the minutes last week from the December FOMC meeting was the mention that it may be soon time to begin discussing the framework for winding down the Quantitative Tightening of balance sheet reduction as reserve balances continue to drift lower. Picking up on that theme over the weekend was Dallas Fed President Lorie Logan discussing the possibility that it may soon be time to start reducing the $60 billion per month in Treasuries that are currently being rolled off. That earlier-than-anticipated timeframe, if it comes to pass,  could reduce one headwind facing Treasuries. Logan used to run the NY Fed’s System Open Market Account so she speaks from more experience about the plumbing of monetary policy than the average Fed official.

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