Pro Perspectives 2/12/24





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February 12, 2024

We get the big January inflation report tomorrow.
Going into this data last month, stocks were on record highs, the 10-year yield was trading around 4%, and the market was pricing in six quarter-point rate cuts for 2024.  
We go into tomorrow's data with stocks, again, on record highs.  The 10-year yield is trading around 4.20% and the market is looking for five quarter-point rate cuts this year.  Of course, these rate expectations have been tamed over the past few weeks by some very deliberate Fed messaging.
That leaves the interest rate market leaning in a direction that creates the opportunity for a positive surprise.  That would come in the form of more weak inflation data, which could influence the Fed to start calibrating for sooner or deeper rate cuts.
With that, let's take a look at the headline consumer price index.  This is where we could get a positive surprise.
We knew heading into last month's report, that the headline CPI would bounce  — breaking the disinflation trend.  And it was because the year-over-year change in the December index value would be measured against the low base of the year prior.  That calculation produced a 3.4% inflation number (up from the prior 3.1%). 
You can see it in this chart  …
You can also see the higher base that the January number will be measured against.  
With that, we looked at this table last month, and deduced that we may be in for an acceleration in the disinflation (i.e. a quickening in the fall of inflation).  And it may start with this report we see tomorrow.   
The government's Bureau of Labor Statistics reports the 12-month change in prices without seasonal adjustments.  That's the index in this table above. 
As you can see in the far right column of the blue shaded area of the table, the 12-month change in prices slides aggressively in the coming months — if we assume the average monthly price change over the past twelve months (of 0.23%).
If prices increased at this average monthly rate in January, we would see a headline inflation number well below 3% tomorrow.  And if we extrapolate that rate of change out to March, the CPI index would be at 2.33% by the Fed's March meeting.