Yield Curve Flattens as Inflation Firms, Retail Sales Remain Strong

Progress in Core Inflation

Consumer price data for October finally provided some optimism for Fed officials ahead of next month’s FOMC meeting.   The Labor Department’s overall consumer price index increased 0.1% last month (+0.1%e, +0.5%p), boosted by increases in housing and medical costs, both of which rose 0.3% last month — helping to offset the 1% decline in energy prices.  Also in-line with expectations, core CPI rose 0.2% during October.  Compared to a year earlier, overall CPI increased 2.0% (2.2%p) while core CPI advanced 1.8% (1.7%p), reflecting acceleration in core inflation on an annual basis for the first time since January.  Also detailed in the report, average hourly earnings grew 0.4% compared to a year earlier.

 

 

Retail Sales Keep Rolling

Sales at US retailers were strong for a second consecutive month during October – a positive indicator heading into the holiday season.  Overall retail sales rose 0.2% (no change expected) last month following the robust 1.9% upwardly revised gain in September, which was largely impacted by outsized post-hurricane motor vehicle and building material sales.  Increases during October were recorded in nine of the thirteen main categories, including sporting goods (+1.5%), clothing (+0.8%) and grocery (+0.7%).  Retail sales within the core group, which excludes autos, gasoline and construction materials, increased 0.3% MoM.   

 

 

US stock markets were unimpressed by today’s positive economic data, as all three major indices declined 0.5%-0.6% during the trading session, weighed down by a 1.2% drop in energy shares.  The tumble in energy shares corresponded with a 0.7% fall in crude oil futures, which extended yesterday’s decline after the IEA reported the expectation for reduced demand and increased US production over the next decade.  The flattening of the Treasury yield curve continued, as yields/swap rates declined 1-7 bps across the curve in a bull-flattening pattern, with the 10-year note yield sliding 5 bps to 2.32%.

 

 

Tax reform continues to be a central theme influencing the growth outlook of investors.  This afternoon, further complications were added to the Senate’s proposed tax plan after Republican Senator Ron Johnson publicly voiced opposition to the bill, stating that the measures unfairly helped corporations more than other business entities.  Combined with yesterday’s announcement of the inclusion of a repeal of the ACA mandate as part of the Senate plan, prospects for a timely passage of the Senate’s tax bill face increased skepticism.         

Consumer Financial Watchdog Steps Down

In regulatory news, Richard Cordray, the director of the Consumer Financial Protection Bureau (CFPB) announced plans today to leave the agency at the end of November. This is welcome news to Congressional Republicans, who have had a strong desire to revamp the agency. This vacancy will enable President Trump to appoint a more business-friendly replacement and promote more deregulation in the financial sector.  It has been expected that Mr. Cordray would resign amid speculation that he intends to enter the Ohio gubernatorial race as a Democrat.