January inflation data shows the Fed still has work to do
Corporates | Kennett Square, PA
A busy week was highlighted by stronger-than-expected inflation in January. CPI, core CPI, and PPI all exceeded market predictions. Retail sales also shattered expectations, while initial jobless claims totaled less than 200,000 for the fifth straight week.
January inflation higher than expected
The consumer price index (CPI) increased by 0.5% in January, coming in higher than expectations (0.4% increase) and signaling that the Federal Reserve may have more work to do to combat inflation. Core CPI and year-over-year CPI also exceeded expectations, rising by 0.4% and 6.4% respectively compared to estimated increases of 0.3% and 6.2%. Food rose by 0.7%, while energy increased by 2% after decreasing in November and December. Within the food index, the price of eggs grabbed headlines with an 8.5% increase in price. Within the energy and energy service indices, the price of gasoline increased by 2.4% and the price of electricity increased by 0.5%. Shelter led the non-core increases, rising by 0.7% in January and up 7.9% from a year ago. A number of Federal Reserve Presidents spoke last week after inflation data were released, citing the need for more rate hikes. Dallas Federal Reserve President Lorie Logan said, “We must remain prepared to continue rate increases for a longer period than previously anticipated.” Philadelphia Federal Reserve President Patrick Harker said, “In my view, we are not done yet… but we are likely close.” The market is currently expecting a 25 bps hike for the March FOMC meeting.
In other Federal Reserve news, President Biden announced that he has picked Lael Brainard, the now former Vice Chair of the Federal Reserve, to lead the National Economic Council.
The producer price index (PPI) continued the trend of beating expectations, rising by 0.7% compared to the market expectation of a 0.4% increase. The 0.7% jump marked the largest increase since June of last year. Wholesale prices excluding food, energy, and trade increased 0.6% in January, the largest increase since March. While the Producer Price Index is not monitored as closely as the Consumer Price Index, an increase in both indices shows that inflation surges are still affecting the economy.
Retail sales shatter expectations
Retail sales rose by 3% in January, far outpacing market expectations of a 1.9% increase. Food services and drinking places led all increases, jumping 7.2% from December and 25.2% from a year ago. Other categories that saw major increases included motor vehicles and parts dealers (+5.9%), furniture and home furniture stores (+4.4%), and electronics and appliance stores (+3.5%). Of the major categories, electronics and appliance stores is the only one to see a year-over-year decrease, falling by 6.3%.
Labor market update
194,000 Americans filed new claims for unemployment benefits for the week ending February 11, below market expectations of 200,000. Falling by 1,000 from the previous week, the 194,000 initial jobless claims marked the fifth straight week where initial claims totaled less than 200,000. Prior to this short streak, initial jobless claims hadn’t dipped below 200,000 since September 2022. Continuing jobless claims increased by 16,000 to total 1.696 million, slightly above market expectations.
The markets react
Treasury yields increased throughout the week, with the 2y yield ending the week at 4.619% and the 10y yield ending the week at 3.815%. Swap rates also continue to rise to their highest levels in months, leaving some corporates questioning their appetite to execute interest-rate trades. The three major equity indices remained relatively rangebound throughout the week, with the S&P 500 and Dow Jones Industrial Average finishing slightly down and the Nasdaq Composite finishing slightly up.
The week ahead
This holiday-shortened week is quieter on the economic front, highlighted by the FOMC minutes for the February 1 meeting scheduled for release on Wednesday and January personal consumption expenditures (PCE) data scheduled for release on Friday.
Subscribe to receive our market insights and webinar invites
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.23-0041
Our featured insights
Resilience remains: reason to raise rates?
Despite high global inflation and borrowing costs, recent economic releases have continued to show a resilient global economy. This resilience may persuade global central banks to continue to raise interest rates to tame inflation.
- Post Date
- Mar 6, 2023
Hot inflation and strong economic data add turbulence to Fed’s fight
In a short week, FOMC minutes were released detailing the pace of rate hikes to combat inflation. New economic data maintained the strong labor market view and tenacious inflation data indicated the Fed’s fight could be prolonged. The war in Ukraine has led to a battle over oil supply; natural...
- Post Date
- Feb 27, 2023
Banks tightened and the market rallied: what’s going on?
The European Central Bank (ECB), Bank of England (BoE), and U.S. Federal Reserve (Fed) all raised their respective benchmark rates last week. The ECB raised rates by 50 basis points to a key rate of 2.5% on Thursday and signaled another 50-basis-point hike was coming at the next meeting in March....
- Post Date
- Feb 6, 2023
GDP, PCE take steps in the right direction ahead of Fed meeting, China’s reopening leads to commodities shift
December metrics for GDP and inflation came in at promising levels, keeping market expectations consistent ahead of this week’s FOMC meeting. China’s reopening leads to increased economic activity, including increased demand for metals and oil, while natural gas struggles due to unexpectedly warm...
- Post Date
- Jan 30, 2023
Retail sales, producer price data suggest cooling economic activity
Markets responded positively to declining PPI and retail sales figures, suggesting that U.S. economic activity, and notably inflation, is slowing. Investors are pointing to the data as another piece of evidence that the Federal Reserve will be able to soften its hawkish stance on rate tightening...
- Post Date
- Jan 20, 2023
Labor market remains stoic as U.S. inflation slows, dollar weakens
The Federal Reserve appears to be in control of inflation after the most recent consumer price index report. Questions linger regarding future rate increases and the subsequent impact on the labor market. The dollar continues its march down from last year’s highs.
- Post Date
- Jan 17, 2023
U.S. jobs market remains strong, nonfarm payrolls data suggest slowing inflation
December payrolls surpassed expectations Friday morning as the U.S. added 223,000 jobs to the economy. While the labor market remains strong, investors noted that wage inflation appears to be easing. On the commodity front, oil and natural gas markets lagged to start the year due to global demand...
- Post Date
- Jan 9, 2023
The market is fighting the Fed yet again
After inflation, retail sales, empire manufacturing, and the Philadelphia Fed business outlook all came in below estimates last week, the market — as evidenced by Treasuries and forward curves — broadly disagrees with the Fed’s interest rate outlook.
- Post Date
- Dec 19, 2022