CPI, FED and More

CPI surprised to downside with a deceleration pattern emerging. Will it continue? Uncertainty abounds, however, let’s look deeper.

CPI printed at 7.1% Y/Y, CORE 6.0% Y/Y much lower than Cleveland FED forecast

M/M we still see an INCREASE although by less of an increase thus a deceleration:

CPI .1% M/M, CORE .2% M/M

The areas that drove this deceleration were Medical Care, Energy and Transportation Services.

Durable and nondurable goods plus housing are all under pressure especially due to the tightening and rate hikes and these pressures could spread to the broader economy.

The FED has held consistent with their primary goal of reducing persistently elevated inflation and to keep at it until it is done. Accordingly, we received a 50bps rate hike in line with projections from FED Watch Tool. They have slowed the pace of the rate hikes as previously mentioned by Powell.

Consumption is weakening. Industrial and new order data all demonstrate consistent contractionary activity. Retail sales also came in lower this past week. Keep in mind, data is in nominal terms so real is far worse.

Let’s look forward.

Cleveland FED is forecasting a lower CPI and CORE. Although it is still INCREASING M/M it is by a lower value. So far the deceleration seems intact but we know uncertainty is center stage so anything can change but it appears to be improving for now.

Per FED Watch, we can anticipate another reduced rate hike in Feb23 and it seems 25 bps may be it. We are currently at 425-450 bps.

Fed terminal rate still over 5% for before mid 2023. Of course things can change quickly. We should keep an eye on the labor market as well.

The market rejoiced but it was very short lived. As for me, I am proceeding with caution. Risk management is tops. I am utilizing reduced position sizing and keeping stops tight.