Bears can’t handle 6.9 - JPM

Good afternoon, 

We’ve got a Santa rally in play. Inflation, gas prices and mortgage rates are down. The labor market remains strong…besides everyone in crypto. SBF was finally arrested, so we’re done talking about him and will let SEC Chair Gensler take over the inevitable click baiting news. 

Is a soft landing back on the table? That’s like asking for a refund on the penny stocks you bought last year. 

Let’s dive in.

Bottom Line Up Front

• Covid is rapidly spreading back through China after its pandemic rules were unexpectedly unwound last week (BBG)

• Goldman Sachs to slash partner bonus pool in half and cut at least a few hundred more jobs (NY Post)

• The Keystone pipeline has now leaked more crude oil than any other conduit on US land in the past 12 years (Reuters)

• A Disney investor is demanding the company turn over internal records about the decision to oppose Florida’s “Don’t Say Gay” Law, given its “far-reaching” financial risks (BBG)

• The LYSE just signed a jumbo procurement deal with Microsoft – and they’re buying the stake from the UK firm’s lead shareholder, a Blackstone consortium (BBG)

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November Inflation, as it happened

Analysts over at JPMorgan have clearly already been told their bonus cuts, because they’re back trolling again with news that a CPI print of <6.9% would end the bear market. Close, but no cigar. Let’s discuss. 

This morning, the Labor Department said that its consumer-price index climbed 7.1% in November from a year ago, down sharply from 7.7% in October. The slump builds on a trend of moderating price increases since June’s 9.1% peak.

Core CPI, which excludes volatile energy and food prices, rose 6% in November from a year ago, easing from a 6.3% gain in October. September’s 6.6% increase was the biggest jump since August 1982.

You’ve heard for months that inflation has peaked. And that’s what banks have been saying too. One day maybe they’ll stop citing the overpaid MD in their research department. Because estimates have been spectacularly wrong the last few years.

So TL;DR - Prices softened significantly on a month-to-month basis. The CPI increased 0.1% in November from the prior month, compared with 0.4% in October. Core CPI rose 0.2% in November, down from 0.3% in October and 0.6% in August and September. 

This all leads up to the trend that consumer prices rose last month at the slowest 12-month pace since December 2021. It closes out a year in which inflation hit the highest level in four decades. It hasn’t only challenged the Fed’s ability to keep the U.S. economy on track, but turned JPow into a local legend across US households. 

How has the November forecast changed?

Expectations have tumbled harder than Kanye’s net worth ever since the unexpectedly low October print (expected 0.7% - actual 0.4%). Median core expectations for the month of November fell from 0.36% to 0.24%, though it has since slowly crept up to 0.32%. Neither the December 1 PCE and wage data release nor the December 2 non-farm payroll employment release caused traders to substantially revise their forecast. 

Why so low in December?

The main cause of the difference between November and December headline forecasts are gas prices, which will not appear in the core data. Gas prices fell 10 cents last week, and markets forecast prices are expected to fall another 15 cents this week. 

We’ll also let you in on some better-kept-secret signals. Private data sources such as Zillow and Apartment List have shown marginal housing and rental prices tumbling since the late summer. That being said, due to methodological differences, don’t expect this data to start showing up in the monthly CPI reports until early 2023.

What does this mean?

Analysts aren’t waiting for client gifting season to go hard. This morning’s 7.1% print marks a rapid deceleration in inflation from October’s rate of 7.7% headline/6.3% core. The print is encouraging news for December’s forecasts, which estimate 0.0% month-over-month headline CPI inflation and 0.3% month-over-month core CPI inflation.

Enter: The soft landing shills. The upcoming forecasts bode well for avoiding the specter of recession. Now, the largest extant risk factor is that stubbornly high price level growth could cause the Fed to tighten monetary policy even further. This would throw the labor market into recession about as quickly as the Bahamas was to arrest SBF (not very, but hey, you did the bare minimum).   

Given inflation fell, as markets expected, anticipate lower mortgage rates and a strong labor market through 2023. 

But we’re not out of the woods yet: markets still project a 42% chance of two consecutive quarters of negative GDP growth in 2023. 

What about tomorrow?

The Fed announcing a 50 bps rate hike tomorrow after its December meeting is about as certain as the US dropping out of the World Cup. As in, there’s currently a ~99% confidence interval, but hey, guess there wasn’t room on the common sense bus for everyone. 

Another 50 bps hike is projected for February, bringing the target range up to 4.75-5.00% (59% confidence). The current projected terminal rate is 5.00-5.25%, first likely reached at the March Federal Reserve meeting.

Why so confident? 

This morning’s unexpectedly low inflation print, paired with the similarly low print for October, are the most important factors. The probability of a 50 bps hike jumped from 53% to 76% as soon as October’s CPI print was released. Recent comments from officials such as by Federal Reserve Governor Christopher Waller may have further contributed to the market’s conviction that the Fed will back off its recent 75 bps pace.

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