Morning Report: Green on the screen as the CPI comes in better than expected

Vital Statistics:

S&P futures4,237112.25
Oil (WTI)74.521.34
10 year government bond yield 3.46%
30 year fixed rate mortgage 6.44%

Stocks are rocketing after the consumer price index came in below expectations. Bonds and MBS are up.

Consumer prices rose 0.1% MOM in November, according to the BLS. The Street was looking for a 0.3% increase, so this is very good news. On a YOY basis, prices are up 7.1%. The core rate (which excludes food and energy) rose 0.2% MOM and 6.0% YOY.

Shelter was the big contributor to inflation, while energy was a drag. Here is a chart of the MOM changes for the past year. It definitely looks like inflation is beginning to return to normalcy on a MOM basis

The December Fed meeting begins today, and I have to imagine this will weigh heavily in the discussion. The December 2022 Fed Funds futures reaction so far is somewhat muted with the probability of a 50 basis point hike rising to 79% from 75%.

The December 2023 Fed Funds futures now look like this:

According to this, the most likely scenario is that the Fed raises rates 50 basis points in December and is then done. The next most likely scenario is another 50 tomorrow and another 25 sometime next year and then it is done. We are seeing some handicapping of a rate cut next year.

This may be too optimistic, but what this graph is telling us is that as of tomorrow, the fed is out of the way. Which should be good news for housing and the mortgage market in general.

Don’t take this as a sure thing. The next shoe to drop is the dot plot which will be released tomorrow. If the Fed still sees 5% in the fed funds rate next year, this rally will probably unwind.

Small business optimism improved in November, but remains below its 48 year average. “Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high,” said NFIB Chief Economist Bill Dunkelberg. “The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.”

Future business expectations remain recessionary, although they are improving. Sales are down, and price increases are abating. Supply chain issues seem to be improving as well.