Daily Market Color

December Rate Hike Back on the Table as Inflation Rebounds

Inflation data released on the day displayed a steady acceleration in consumer prices during the month of August.  The consumer-price index recorded its largest monthly jump since January at +0.4% (+0.3% expected), driven by increases in energy (+2.8%) and shelter (+0.5%) prices.  Core CPI growth was also robust at +0.2%, representing one of the first readings that supports the Fed’s view that the recent tepidness in inflation was “transitory.”  Compared to a year earlier, overall CPI edged 1.9% higher and core CPI held steady at 1.7%, both below the Fed target of 2%.  Heading into next week’s policy meeting, today’s report provides the FOMC with a healthy outlook for inflation and makes the case for a third rate hike before the end of the year, where the current probability has shifted to over 50% as per fed funds futures.



Other key economic data on the day included the Labor Department’s initial jobless claims, which totaled a seasonally adjusted 284,000 (+300,000 estimated) for the week ended September 9th.  The reading was an unexpected decline from the prior week’s 298,000 claims, albeit still elevated from the healthy levels consistently reported earlier this year as the impact from Hurricane Harvey continues to be felt in the jobs market.  Overall, initial claims for unemployment have held below 300,000 for 132 consecutive weeks.  Also detailed in the report, the number of continuing claims declined by 7,000 to 1.944 million for the week ended September 2nd.        
US stock indices are mixed on the day, with the DJIA up 0.2% while the S&P (-0.1%) and Nasdaq (-0.4%) edged lower.  Energy shares provided the largest boost to equity indices, as crude oil rose above $50/barrel for the first time in a month before settling back down to its current level of $49.60/barrel, up 0.6% for the trading session.  US Treasurys sold off for a 5th consecutive day, with yields/rates climbing 1-3 bps across the curve.  The yield on the 10-year note is now trading near 2.20% after touching close to 2.00% last Friday.



Across the pond, the Bank of England concluded its policy meeting with the decision to leave the current benchmark rate unchanged at 0.25% and maintain its existing QE program.  The Monetary Policy Committee (MPC) voted 7-2 in favor of holding steady its current policy, in-line with expectations, however the minutes released afterwards provided a more hawkish tone than anticipated.  Despite the uncertainty surrounding the economic effect of Brexit, recent data has displayed a pickup in consumer prices, and the BOE now projects inflation to exceed 3% next month and remain considerably above its 2% target for the next few years.  With that in mind, the majority of the MPC felt that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.”  The pound surged 1.2% to its highest levels of the year following the announcement, and the odds for a rate hike by the BOE in November rose from 40% to over 50%.



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