Morning Report: The Consumer Price Index comes in hotter than expected.

Vital Statistics:

S&P futures3,511-77.75
Oil (WTI)86.78-0.54
10 year government bond yield 4.03%
30 year fixed rate mortgage 6.94%

Stocks are lower this morning after the consumer price index came in hotter than expected. Bonds and MBS are down.

The consumer price index rose 0.4% MOM and 8.2% YOY. Ex-food and energy, it rose 0.6% MOM and 6.6% YOY. Both numbers were higher than expected. Gasoline price declined, while food continued to rise. Shelter increased as well, and will continue to increase as it tends to lag home prices by about 18 months or so.

So far, we aren’t seeing anything that looks like deceleration in the core rate.

We will not get another CPI reading before the Fed meets in November. The FOMC meeting is November 1-2, so this is the number they will focus on, along with the PCE Index.

The Fed Funds futures are a lock for at least 75 basis points at the next meeting, and are beginning to handicap a 100 basis point hike as a possibility.

The FOMC minutes were released yesterday, and here is what they were saying about inflation:

Participants observed that inflation remained unacceptably high and well above the Committee’s longer-run goal of 2 percent. Participants commented that recent inflation data generally had come in above expectations and that, correspondingly, inflation was declining more slowly than they had previously been anticipating…. With respect to the medium term, participants judged that inflation pressures would gradually recede in coming years…

In assessing inflation expectations, participants noted that longer-term expectations appeared to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters as well as measures obtained from financial markets. Participants
remarked that the Committee’s affirmation of its strong commitment to its price-stability objective, together with its forceful policy actions, had likely helped keep longer run inflation expectations anchored…

Participants agreed that the uncertainty associated with their economic outlooks was high and that risks to their inflation outlook were weighted to the upside. Some participants noted rising labor tensions, a new round of global energy price increases, further disruptions in supply chains, and a larger-than-expected pass through of wage increases into price increases as potential shocks
that, if they materialized, could compound an already challenging inflation problem. A number of participants commented that a wage–price spiral had not yet developed but cited its possible emergence as a risk.

Anyone thinking the Fed is considering a pivot should be disabused of that thought from these comments. They noted that credit spreads were stable over the inter-meeting period and they think GDP growth will improve. In other words, they aren’t worried about a recession at all.