Pro Perspectives 1/8/23





Please add to your safe senders list or address book to ensure delivery.

January 08, 2024

We get the December inflation report on Thursday. 
This will be the first meaningful event of the year for markets. 
And then Q4 earnings will kick off on Friday, with the big banks.
On the inflation report front, as we've discussed along the way, energy prices have been the major contributor to the collapse in headline inflation from its peak of 9%, to near 3%. 
And we should expect that trend in falling energy prices to have continued in December
If we look at the EIA (U.S. Energy Information Administration) data on gas prices for December, those prices were down again, year-over-year and month-over-month (-1.8% and -5%, respectively).   Natural gas prices are still way down from the very high levels of last year.  On a yearly change, natural gas prices are down over 50%, and down 7% from November to December.  Crude oil?  Down 6% year-over-year, and down 7% on the month. 
So, we should expect the energy price drag to weigh (again) on December headline CPI. 
If we look to Costco for clues on broader consumer prices, in the December earnings call, the Costco CFO said that inflation had fallen to the 0% to 1% range (year-over-year) at the last quarter end – with some items falling in price (deflation) by as much as 20%-30%, largely due to the huge correction in freight costs.
With the above in mind, the interest rate market has been pricing in March for a first rate cut, for a total of six quarter-point cuts for the year.  The Fed has projected a first rate cut in June, for a total of three quarter point cuts for the year.
And what was a small chance of a move by the Fed as early as this month (its January 31 decision), has been priced out over the past week. 
That said, as we discussed last week, given the clear trend of falling inflation, the proximity of inflation to the Fed's target (getting close), and the quickening of the fall in the Fed's favored core PCE last month, a weaker than expected CPI report on Thursday should get the Fed thinking about January, or at the very least talking publicly about doing sooner and more aggressive cuts.