Fighting the Fed.
In this buzz: Jerome Powell and his bet against the house⚠️; Consumer Price Index dropped 0.1%*; Ex-food and energy; the core CPI rose and more …
Bet against the house⚠️:
It’s never proven to bet against the house. The odds simply aren’t in your favor. Yet, that is exactly what seems to be happening in the rates and equity markets this week as some traders believe Jerome Powell isn’t going to stay as high for as long as he claims.
Rate cut bets:
Some participants have even placed rate cut bets (gasp!) recently as signs continue to emerge that the Fed is winning its battle with inflation. While the FOMC isn’t close to taking a victory lap anytime soon, traders were encouraged by this morning’s closely watched December CPI figures which were in line with expectations.
CPI dropped with 0.1%:
2022 ended with inflation on its heels, as it posted its biggest month decline since the early days of the pandemic. CPI (Consumer Price Index) dropped 0.1%* for the month, its largest month-over-month drop since April 2020, back when people were staying indoors and wiping down their Amazon deliveries with hoarded Clorox.
In “glass half full land”:
Despite the monthly decline, headline CPI is up 6.5% versus one year ago, underlying the persistent toll higher prices are taking on U.S. consumers. In “glass half full land”, that the smallest annual increase since October 2021.
Ex-food and energy**, which are volatile, the core CPI*** rose 0.3% which is also in line with expectations as was the core year-over-year increase of 5.7%.
CPI is the most closely watched inflation figure as it considers a wide basket of goods and services. Jerry P prefers a different gauge that adjust for consumer behavior but keep in mind that the Fed also uses CPI and other information to measure inflation.
41-year highs
The Fed is trying to decide how much further they have to go to slow the economy and bring inflation down from 41-year highs. So far, they have raised the Fed Funds rate to 4.25%, its highest level in 15 years and indicated they are targeting 5% or more before they are willing to pause and assess the impact of their work.
*If the CPI declines, that means there’s deflation, or a steady decrease in the prices of goods and services. The CPI is compiled and released every month by the Bureau of Labor Statistics (BLS), which is a sub-agency of the Department of Labor.
**Ex-Food and Energy: A measure of inflation in the United States that considers what people spend on staple goods and services other than food and energy. It is calculated by taking the average of price changes to a basket of goods and services compiled by the U.S. Department of Labor. The ex-food and energy index is identical to the Consumer Price Index except that it leaves out food and energy. Some consider the ex-food and energy index a more reliable measure of inflation, as food and energy prices are quite volatile. Critics, however, contend that leaving these prices out does not adequately measure short-term changes in the real value of money.
***The Core Consumer Price Index (CPI): measures the changes in the price of goods and services, excluding food and energy. The CPI measures price change from the perspective of the consumer. It is a key way to measure changes in purchasing trends and inflation.
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