"Mirrors on the ceiling
The pink champagne on ice
And she said, 'We are all just prisoners here
Of our own device"
And in the master's chambers
They gathered for the feast
They stab it with their steely knives
But they just can't kill the beast"
- "Hotel California" Felder, Henley, Frey (The Eagles), 1977
Wounded Beast
Maybe they just can't kill the beast. If so, they certainly have made a lot of progress in getting where "they" want to go.
Consumer prices, at the headline level, after peaking in June 2022, have now eased to their slowest pace of annual growth since October 2021. The 6.5% rate of year-over- year inflation reported by the Bureau of Labor Statistics for the month of December is both a long way from roughly 2% inflation enjoyed seemingly forever into the pandemic year of 2020 and a long way from the 9.1% apex of six months earlier. This headline rate dropped into contraction (-0.1%) on a month-over-month basis for the first time since June 2020 after peaking at 1.3% this past July.
Beyond that headline level, there are many ways to slice and dice the data as it has become the central bank's aim with labor markets having come out of the pandemic showing strength upon the price stability side of their dual mandate. For December, the core rate hit the tape at 5.7% year over year and 0.3% month over month, both as expected. The core rate of inflation now stands at its slowest pace of acceleration since November 2021.
Of course, as we have become more sophisticated, we have focused on looking at services-related inflation and "sticky" inflation. Most Fed officials have expressed a feeling that in order to root out these tougher-to-crack measures for inflation, that perhaps a lengthy period of little to no economic growth and weaker labor markets than we have now is called for. On that track, labor force participation appears to be on the upswing, which is a positive. While this increased participation has not yet hurt the unemployment and underemployment rates, there is now clear evidence that both wage growth and weekly hours worked are coming under new pressure.
The Problem
The problem with the Consumer Price Index data is that it is inaccurate.
How so? We know that the component for shelter is significantly out of date. Why the Bureau of Labor Statistics, knowing this, has never moved to update either the way that data for shelter are collected or the formula for CPI is beyond me. It's simply maddening to be honest. Shelter accounts for roughly 32.9% of CPI, and the data that go into the shelter component are not up to date. Indeed, it can be many months to almost a year old. For example, the housing survey uses a 12-month moving average of average prices from preceding months because average prices for the current month are not available.
That's simply not good enough. The Shelter component hit the tape at growth of 0.8% month over month for December, well above the headline numbers reported. Yet we know that existing homes sales -- the largest slice of the housing pie -- have contracted from the month prior for 10 months in a row.
We also know that the FHFA Home Price Index, which runs with a two-month lag, has printed at +0.1%, -0.6%, -0.7% and +0.1% for the four months of July through October. Hmmm. The Case-Shiller HPI, also with a two-month lag, on a month-over-month basis over those same four months ran off an even more aggressively negative streak: -0.8%, -1.6%, -1.5%, -0.8%. In addition, there is plenty of anecdotal and more-than-anecdotal evidence that monthly rent prices have stopped moving higher.
Still, the charade goes on. For the past three months, the BLS has reported seasonally adjusted growth in shelter prices as +0.8%, +0.6% and +0.8%. Fantasy land. For those same months, the BLS has input values of +0.8%, +0.7% and +0.8% for rent and values of +0.6%, +0.7% and +0.8% for owners' equivalent rent of primary residence.
It is simply beyond the pale. This is a time in monetary and economic history where accurate measurement of consumer inflation has probably never been more important, and a time when private enterprise can track in real-time your interests and habits. How can a federal agency providing crucial data to policy makers impacting each and every one of us somehow not modernize the method by which this data is collected? Subsequently, how can these policy makers be satisfied, knowing that their decisions are made in full acknowledgement that the data used is incorrect? How?
Market Reaction
With the above-mentioned beast obviously wounded, markets rejoiced. The auction of $18 billion of US 30-year bonds went about as well as did the auctions of 10-year and three-year paper earlier this week. The US Dollar Index eased. Yes, and equities performed well one day ahead of the plethora of large banks that will report this morning. Small caps out-performed everyone.
The Russell 2000 ran 1.74%, posting a fifth consecutive daily win. The Nasdaq Composite (+0.64%) and Philadelphia Semiconductor Index (+1.24%) also now possess five-day winning streaks. The S&P 500 was the laggard, gaining just 0.34% for the session, and putting together "just" a three-day winning streak, its longest since Nov. 4 through Nov. 8.
Market internals were strong yet again. Eight of the 11 sector SPDR ETFs ended the session in the green with Energy (XLE) leading the way, up 1.91%. Defensive sectors aggregated near the bottom of the day's performance tables, as has been the case all week. Winners beat losers by about 3 to 1 at the New York Stock Exchange and by roughly 5 to 2 at the Nasdaq. Aggregate trading volume increased day over day for NYSE listings, Nasdaq listings, across the S&P 500 and across the Nasdaq Composite as advancing volume took either a 71% or 76.4% share depending on which listings are focused upon.
There was one big "but," though. Isn't there always? With buyers moving into the belly out to the long end of the Treasury curve and the Fed propping up yields on the short end, the yield spread between the US Ten-Year Note and Three-Month T-Bill continues to exacerbate and now looks like this...
For all the talk of a soft landing for the US economy and potentially escaping this year without any recession at all, US Treasury markets are screaming "Baloney."
Fed Heads
"I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward."
... Philadelphia Fed President Patrick Harker
"I've been in the camp that we need to get rates above 5%. How far above? We'll let the data dictate that. But, I don't think we need to get much further than 5% at this point. And then sit for a while so that we're not causing undue harm to the labor side."
... Philadelphia Fed President Patrick Harker
"Now, with forward-looking real rates positive across the curve and therefore our foot unequivocally on the brake, it makes sense to steer more deliberately as we work to bring inflation down."
... Richmond Fed President Tom Barkin
Yes, Virginia, there was a Santa Claus, and there is also more sentient thought at the central bank that we had known. All that "thoughtful" crowd needed was someone to step forward and be first. Boston Fed President Susan Collins took that step on Wednesday. Apparently, there are a few other individuals at the Fed also capable of reason.
Good Luck...
With the banks today, gang. Catch you later this morning at Real Money.
Economics (All Times Eastern)
08:30 - Import Prices (Dec): Expecting -0.8% m/m, Last -0.6% m/m.
08:30 - Export Prices (Dec): Expecting -0.6% m/m, Last -0.3% m/m.
10:00 - U of M Consumer Sentiment (Jan-adv): Expecting 60.4, Last 59.7.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 772.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 618.
The Fed (All Times Eastern)
07:30 - Speaker: Philadelphia Fed Pres. Patrick Harker.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BAC) (0.80), (BLK) (7.86), (BK) (1.29), (C) (1.20), (DAL) (1.35), (FRC) (1.80), (JPM) (3.12), (UNH) (5.18), (WFC) (0.99)
