US Consumer Inflation Decelerates in November to 7.1% from 7.7% Buoying Markets

The November CPI report had been treated with anxious trepidation by the market, there had been record puts purchased on the major indices to protect downside risk sending the VIX higher prior. CPI was reported up 0.1% month-over-month in November (consensus +0.3%) and core-CPI was up 0.2% month-over-month (consensus +0.3%). On a year-over-year basis, total CPI was up 7.1%, versus 7.7% in October, and core-CPI was up 6.0%, versus 6.3% in October. CPI was lower for a fifth straight month to the lowest since December last year.

After the data official release stocks flew higher as yields and the US dollar fell after further deceleration in inflation, not as big as the previous month but sizeable. The move exaggerated by derivative flow to cover deltas pre option market open. The previous month’s report also surprised to the downside and led to a +7% rally in the Nasdaq, today it is up 11500 up 353.2 or 3.22% after the release, let’s see if this sticks at the end of the day. A reminder we are coming off June’s 9.1% inflation rate which was the highest in four decades. CPI has moderated after resurging in August with aggressive Fed interest rate rises.

Inflation

US November 2022 Highlights

CPI

  • US CPI M/M Nov: 0.1% (est 0.3%, prev 0.4%)
  • US CPI Y/Y Nov: 7.1% (est 7.3%, prev 7.7%)
  • The food index was up 0.5% month-over-month and up 10.6% year-over-year.
  • The energy index was down 1.6% month-over-month and up 13.1% year-over-year.
  • The shelter index was up 0.6% month-over-month and up 7.1% year-over-year.
  • The used cars and trucks index declined 2.9% month-over-month and was down 3.3% year-over-year.
  • Services inflation held steady at 7.2% year-over-year.
  • Excluding medical care services, services inflation actually increased to 7.6% year-over-year, versus 7.5% in October.
  • Excluding rent of shelter, services inflation moderated to 7.3% year-over-year from 7.5% in October.
United States Consumer Price Index (CPI)
United States Consumer Price Index (CPI)

 

United States Inflation Rate
United States Inflation Rate

Core inflation:

  • US CPI Ex Food And Energy M/M Nov: 0.2% (est 0.3%, prev 0.3%)
  • US CPI Ex Food And Energy Y/Y Nov: 6.0% (est 6.1%, prev 6.3%)
United States Core Inflation Rate
United States Core Inflation Rate

Real Earnings

  • US Real Avg Hourly Earnings (Y/Y) Nov: +0.5% (prev -3.0%)
  • US Real Avg Weekly Earnings (Y/Y) Nov: +0.2% (prev -3.8% revised to 0.0%)

Real average hourly earnings for all employees increased 0.5 percent from October to November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.6 percent in average hourly earnings combined with an increase of 0.1 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 0.2 percent over the month due to the change in real average hourly earnings combined with a decrease of 0.3 percent in the average workweek.

Real average hourly earnings decreased 1.9 percent, seasonally adjusted, from November 2021 to November 2022. The change in real average hourly earnings combined with a decrease of 1.1 percent in the average workweek resulted in a 3.0-percent decrease in real average weekly earnings over this period.

Real weekly earnings are up after being down for a record 18th consecutive month. Inflation-adjusted earnings had declined for 89% (16 of 18 months).

The Fed is likely to want evidence of an inflation slowdown, another 0.50-point rate rise could be on the table at the next meeting as rises “depend on the data we get between now and then.”

Market Reaction (updated at 10:00 AM ET)

The report resulted in a stock markets surge, the US dollar sank, and bonds rallied strongly.

  • Dow +519.63 at 34530.01,
  • Nasdaq +368.59 at 11452.17,
  • S&P +97.00 at 4087.98 +2.5%, futures were up 3% at the highs after the release
  • Vanguard Mega Cap Growth ETF (MGK) up 3.6%
  • Invesco S&P 500 Equal Weight ETF (RSP) up 2.2% 
  • All 11 S&P 500 sectors positive territory led by communication services (+4.8%) and information technology (+3.9%). 

U.S. Treasuries sit on their highs after jumping in reaction. The 10-yr note and the 30-yr bond trade a bit below their post-data highs at this juncture while shorter tenors are building on their gains. Equities are on track for a firmly higher start with futures on the S&P 500 up nearly 3.0%.

  • 2-yr: -27 bps to 4.12%
  • 3-yr: -28 bps to 3.86%
  • 5-yr: -24 bps to 3.56%
  • 10-yr: -17 bps to 3.44%
  • 30-yr: -9 bps to 3.4949269

In forex the USD is sharply lower with risk on flows on the back of the higher stocks, lower yields, lower dollar. The AUDUSD rose around 1.87% at .68.59. The JPY rose around 2.0% in volatile trading at 134.88

Monthly Price Increases

  • Used cars -2.9% m/m vs -2.4% m/m prior
  • Food +0.5% m/m vs +0.6% m/m prior
  • Energy -1.6% vs +1.8% m/m prior
  • Gasoline -2.0% m/m
  • Fuel oil +1.7% m/m +19.8% m/m prior
  • New vehicles 0.0% m/m vs +0.4% prior
  • Apparel +0.2% vs -0.7% prior
  • Medical care +0.2% m/m vs 0.0% prior

Outright deflation for used cars & trucks in November CPI inflation, -3.3% y/y (slowest since September 2017) @LizAnnSonders

@LizAnnSonders

Yearly Price Increases

  • Energy cost increased 13.1%, below 17.6% in October, due to gasoline (10.1% vs 17.5%), fuel oil (65.7% vs 68.5%), and electricity (13.7% vs 14.1%).
  • Slowdown was also seen in food prices (10.6% vs 10.9%) while prices of used cars and trucks declined by 3.3% (after a 2% rise in October).
  • On the other hand, the cost of shelter increased faster (7.1% vs 6.9%).

Shelter Costs Adding to Homeless

Shelter component of CPI had largest m/m increase since August 1990

Shelter costs, the biggest services’ component and make up about a third of the overall CPI index. Rent of shelter was up the most on record on an annual basis last month, as was owners’ equivalent rent. Rent Inflation in the United States increased to 7.10 percent in November from 6.90 percent in October of 2022

What is unnerving the housing components of the report have a lag between real-time changes in rents and home prices and when those are reflected in Labor Department data.

Rent Inflation

Rent Inflation

Housing Utilities

United States CPI Housing
US CPI Housing Utilities

Many analysts had expected back in March, clearly, they have been mistaken to mark the inflation peak although the war in Ukraine is far from over, supply chain bottlenecks persist, and consumer demand remains elevated which is likely to weigh on the CPI.

The hope was the slowdown back in April was a sign that inflation had probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed’s 2% target for a long time as supply disruptions persist and energy and food prices remain elevated.

Food Inflation Persistently High

United States Food Inflation
US CPI Food inflation

Cost of food in the United States increased at a slower 10.6% from a year earlier in November of 2022, decelerating from a 10.9% rise in October and a peak of 11.4% in August.

  • Lowest reading since June, as prices slowed down
  • Food at home (12% vs 12.4% in October)
  • Food away from home (8.5% vs 8.6%).%)

Transportation Inflation Persists

United States CPI Transportation
US CPI Transportation Inflation

The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have been weighing on prices. Since last year many businesses closed and lockdowns were imposed, denting economic activity leaving the world vulnerable.  A jump in commodities and material costs, coupled with supply constraints pushed producer prices up and some companies are passing those costs to clients

“I’m making more money…But I don’t see it because I’m paying more money for stuff now.” Low-wage workers are getting sharp raises. Inflation is eating them up. via Greg Ip WSJ

 Source: BLS BLS

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