Rate Watch (late 1 day)

Inflation came in lower than expected. We saw the bond market rally more on Friday than any other day this year. Inflation year over year was lower but month over month did not decrease. However, the fact that it beat expectations was enough to spark a rally.

The Fed will be looking for trends/patterns, not one-offs. They will want to see month-over-month decreases and/or a consistent 3 months of cooling inflation. They cannot risk pivoting too soon only to see inflation heat up again – which would result in further hikes. Not only will this be a poor policy for the economy but they will further lose credibility.

Running with the “good” CPI report, institutions are placing their bets accordingly with over 80% believing we will see a 50 bp hike in December.
 

You can see how that number has jumped dramatically with the release of the recent CPI data.
 

Although these are promising signs, it is just from one CPI report. The Fed wants to fight inflation aggressively before the economic cracks begin to surface and conquer mainstream media. If they can juice rates up for a few more months before we get lackluster jobs reports then they will be able to control the narrative. If inflation and unemployment run rampant, that is where things get tough.

Should this happen they will choose to cut rates to fight a recession rather than raise them to fight inflation. Then, due to increasing prices (effects of inflation), they will provide PLENTY of stimulus (increase monetary supply aka create inflation) to make the layman happy enough to not rebel.

We get unemployment numbers on December 16^th, so keep that on your radar. With Meta’s recent 11,000 employee layoff the jobs outlook continues to dim.
 
Here is what we have this week

Monday

• NY Fed 1 and 5 yr Inflation Expectations

• PPI Data
• Real Household Debt

• Retail Sales
• NAHB Home Builders’ Index

• Initial and Continuing Jobless Claims
• Building Permits
• Housing Starts

• Existing Home Sales

 
Chart Check (SEE ABOVE)

Taking a look at the 10yr US Treasury (moves in tandem with mortgage rates) we see things playing out exactly as described last week. We crossed below the support trendline, retested it, and bounced lower. I can see us retesting the late September/early October levels as that is where we can see some level (nothing strong) of support. If so, we will have better rates in the short term.