October CPI, Fed Speak, and Budget Bill Madness

This holiday-interrupted week (Veterans Day on Thursday) will be headlined by the latest inflation data. With the October jobs report posting strong numbers, and with impressive wage gains, investors will be casting a weary eye on the CPI numbers. The Fed has planted their flag squarely in the camp that supply-side shortages are responsible for the lion-share of cost increases. But if continued above-average wage gains start to fuel higher demand the Fed may have to begin recasting their messaging.  The Fed did modify their language about transitory inflation in last week’s FOMC statement by adding the modifier “expected transitory” which implies an additional level of uncertainty.

We have mentioned before that the fourth quarter would likely see continued increases in YoY CPI given the low monthly numbers rolling out of the calculations from last year. The October numbers are already expected to be steamy but any upside surprises, coupled with the increasing wage gains, could ignite a discussion about speeding up tapering in order to get to rate hikes sooner.

Up to nine Fed speakers will get to update the markets on their views now that they have the October jobs numbers in hand, and by mid-week the latest CPI numbers, so expect some headlines from the likes of James Bullard and others seeking some attention.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.04% -0.01%
6 Month 0.06% Unchanged
1 Year 0.14% +0.02%
2 Year 0.43% -0.08%
3 Year 0.69% -0.09%
5 Year 1.09% -0.12%
10 Year 1.48% -0.10%
30 Year 1.91% -0.06%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.14%
6 Mo LIBOR 0.22%
12 Mo LIBOR 0.36%
Swap Rates  
3 Year 0.889%
5 Year 1.177%
10 Year 1.507%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Nov 9 NFIB Small Biz Optimism Oct 99.3 99.5 99.1
Nov 9 PPI Final Demand (MoM) Oct 0.6% 0.6% 0.5%
Nov 9 PPI Final Demand (YoY) Oct 8.6% 8.6% 8.6%
Nov 10 CPI (MoM) Oct 0.5% 0.6% 0.4%
Nov 10 Core CPI (MoM) Oct 0.4% 0.4% 0.2%
Nov 10 CPI (YoY) Oct 5.8% 5.9% 5.4%
Nov 10 Core CPI (YoY) Oct 4.3% 4.3% 4.0%
Nov 12 JOLTS Job Openings Oct NA NA 10.439m
Nov 12 U. of Mich. Sentiment Nov P 72.4 72.5 71.7

 


Top 5 Events for the Week

November 8 – 12, 2021

1.  October CPI— Wednesday

With the October jobs report posting strong numbers, and with impressive wage gains, investors will be casting a weary eye on the CPI numbers. Much has been made of the supply-side cost increases but if continued above-average wage gains start to fuel higher demand the Fed may have to begin recasting its “transitory” messaging.  For October, overall CPI is expected to increase  0.6% versus 0.4% the prior month. The core rate (ex-food and energy) is expected to increase 0.4% versus 0.2% in September.  Overall CPI (YoY) is expected to rise to 5.9% from 5.4% in September. Core CPI (YoY) is expected to lift to 4.3% from September’s 4.0%. The rate peaked at 4.5% in June.

The Fed modified their language about transitory inflation in last week’s FOMC statement and press conference by adding the modifier “expected transitory” which implies an additional level of uncertainty. We have mentioned before that the fourth quarter would likely see continued increases in YoY CPI given the low monthly numbers rolling out of the calculations from last year, but any upside surprises here, coupled with the increasing wage gains, could ignite a discussion about speeding up tapering in order to get to rate hikes sooner.

 

Source: Bloomberg

2.  Fed Speak – All Week

While normally you wouldn’t expect different messaging from Fed speakers the week after an FOMC meeting, this time it may be different. With the October jobs report in hand, and by mid-week the latest CPI numbers, there is a chance for some new views to emerge. Nine different Fed officials are scheduled to speak in one forum or another with Chair Powell slated to speak today and tomorrow. While he’s not likely to change his tune, Vice Chair Richard Clarida gets an opportunity to speak later today and the headline-seeking St. Louis Fed President James Bullard will be on a UBS panel tomorrow. While we don’t expect any major shifts in messaging, the opportunity to make headlines is not often missed, especially by the likes of Bullard.

3. Developments on the Budget Bill – All Week

The House narrowly approved the Biden Infrastructure Bill on Friday sending it to the President’s desk for signing into law. Now attention turns to the larger budget bill where the outcome remains very uncertain. Democratic Senator Joe Manchin (D-WV) has been adamant in his distaste for certain elements of the budget bill and continues to negotiate it down in size. The progressive wing of the House wanted a vote on both bills at the same time, fearful that the more contentious budget bill would die in limbo, along with its social spending programs found in the proposal, after the less controversial infrastructure bill passed. They relented at the 11th hour in order to pass something so now the political football that is the budget bill is in the hands of Majority Leader Schumer (D-NY) as to how to proceed from here. It could be an interesting week.

4. September Job Openings and Labor Turnover Survey—Friday

The October jobs reports represented a solid rebound from September’s less impressive results, but even those numbers were revised higher casting a much better glow on the labor market heading into the fourth quarter. The JOLTS Survey will be another data  point that should confirm the health of the labor market.  Job openings set a record high of 11.098 million in July then dipped a bit in August to 10.439 million as Delta variant cases obviously slowed some parts of the economy. With supplementary unemployment benefits now history, this report could provide some interesting details as to whether all those job openings are starting to be filled. Stay tuned.

5. University of Michigan Consumer Sentiment – Friday

Two-thirds of the US economy is consumption-based so gauging consumer sentiment is crucial to determining how they feel about spending. Sentiment took a huge hit in August as inflation expectations and rising virus cases sent sentiment to a decade low reading.  Sentiment crept slowly higher since then, but not by much. The Bloomberg consensus is for sentiment to be slightly better again in November at 72.5 versus 71.7 the prior month. Sentiment peaked at 101 in February 2020 so we have plenty of work to get back to pre-pandemic levels. Inflation expectations will be watched closely too as they remain uncomfortably high at 4.8% in October for the 1yr outlook and to 2.9% in the 5-10yr outlook.

Yield Universe

Source: SouthState Bank Trading Desk

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Published: 11/08/21 Author: Thomas R. Fitzgerald