Inflation is Back in Fashion

Consumer price data released by the Labor Department this morning hinted that the long run of stagnant inflation in the US may be coming to an end.  Headline CPI printed at +0.5% in January, exceeding estimates of a 0.3% rise, led by a 1.7% increase in apparel prices and 1.3% jump in motor vehicle insurance.  Compared to a year earlier, overall CPI was up 2.1%.  Core CPI similarly outpaced median forecasts, gaining 0.349% on the month (+0.2% expected) – its fastest pace in nearly 13 years.  On an annual basis, core consumer prices rose 1.8%, matching the previous month’s level and beating estimates of +1.7%.

 

 

The acceleration in consumer price growth supports the rhetoric of Fed officials over the course of the past year, which labeled recent readings of soft inflation as “transitory”.  As per the CME FedWatch Tool, Fed rate hike expectations improved with the news, as the probability of a quarter-point increase at the March FOMC meeting rose above 83%, up from 66.5% one month ago.  The bond market’s reaction to the CPI data included a steep, belly-led selloff in Treasurys, with yields/swap rates gapping 5-10bps higher across the curve.  The 10-year note yield climbed above 2.90% to its highest level in more than four years.             

 

 

Equity markets were not scared away from the strong inflation data (to the surprise of many market pundits), as all three major US indices posted gains of 1%-1.9% on the day.  Financial shares saw some of the biggest bumps on the day (+2.9%), in addition to the energy sector which rallied alongside strong increases in crude oil prices.  The surge in crude was driven by a report from the Energy Information Administration released earlier today that reflected a smaller than anticipated rise in US crude supply.  WTI crude futures climbed 2.6% for the trading session to $60.75/barrel.         

 

 

Retail Data Not as Positive

Sales at US retailers unexpectedly declined during January as consumer spending cooled from the 3.8% annualized pace recorded in Q4 of 2017.  Overall retail sales fell 0.3% (+0.2% expected) last month, and December’s reading was revised 0.4% lower to reflect no change.  Declines were recorded in 7 of the 13 major retail sectors, with auto dealerships experiencing the largest pullback in sales (-1.3% MoM). Core retail sales, which excludes autos, gasoline and construction materials, were flat during January, missing expectations of a 0.4% rise.