The stakes for Thursday's consumer price index inflation report just got a lot smaller. Federal Reserve policymakers are now indicating that the upsurge in the 10-year Treasury yield has reduced already low odds for a rate hike on Nov. 1.
Plus, Wednesday's producer price index data offered good news for the Fed's primary inflation rate, the core PCE price index, which will be released at the end of the month. Airfares and portfolio management service fees both fell, while health care services inflation remained tame.
"Financial markets are tightening up and they are going to do some of the work for us," Fed Governor Christopher Waller said Wednesday, alluding to the rise in the 10-year Treasury yield.
On Monday, hawkish Dallas Fed President Lorie Logan said "there may be less need to raise the fed funds rate" due to higher long-term interest rates.
CPI Inflation Forecasts
The Fed's primary inflation rate, the core PCE price index, has shown that price pressures have eased dramatically over the three months through August. On a three-month annualized basis, core PCE inflation is running at just 2.1%, down from 3.1% in July. However Fed Chair Jerome Powell has said the Fed needs to see six months of tame data to gain confidence in the trend.
The core CPI hasn't been quite as tame, rising 0.3% in August vs. a 0.1% gain for the PCE price index. Wall Street economists expect another 0.3% rise in September. That would lower the 12-month core CPI inflation rate to 4.1% from 4.3%. Overall prices, including food and energy, also are seen rising 0.3%, which would trim overall CPI inflation to 3.6% from 3.7%.
Despite August's bigger-than-expected rise in the core CPI on Sept. 13, the S&P 500 finished slightly higher that day. That may be an indication that the CPI isn't as important as the PCE in the minds of investors at the moment. One reason is that housing accounts for about 42% of the core CPI but just 17% of the core PCE price index.
The excessive weight of housing makes the CPI less representative of consumer outlays. Plus, the government's methodology for tracking rents doesn't fully reflect changes in market prices for about a year. In August, the CPI showed shelter costs up 7.25% from a year ago, while Zillow's rent index rose just 3.25%.
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Pay Attention To the PPI
Key inputs for the core PCE inflation report at month's end came out with Wednesday's producer price index. The PPI's measure of health care services inflation feeds directly into PCE data. In September, health care services prices rose just 0.1%, unadjusted for seasonal effects.
Also, the PPI is the source of PCE data on airfares, which is based on the average price per mile traveled paid by passengers. The CPI airfare measure is based on prices for a sample of routes. Recently, the two measures have diverged significantly, with the PPI measure running hotter than the CPI's, but that might be shifting. In September, the PPI reading for airline services fell 2.1%, seasonally adjusted.
Portfolio management fees, another key input for core PCE inflation, also was previewed by the PPI. After gains of 7.2% in July and 1.9% in August, fees fell 0.5% in September. Portfolio management fees had surged in July, as the stock market hit its high for the year, then moderated in August. But fees fell in September, when the S&P 500 had its worst month of the year.
Fed Rate-Hike Odds
As of Wednesday afternoon, markets are pricing in just 9% odds of a Fed rate hike on Nov. 1, down from about 27% on Friday. Odds of a rate hike by Dec. 13 have eased to 28% from 42%.
S&P 500
The S&P 500 rose 0.1% in Wednesday afternoon stock market action. The S&P 500 is looking for a fourth-straight gain and is making a run at its 50-day moving average. Friday's turnaround session for the S&P 500 could turn out to be an inflection point, but that's not assured, so investors should still act with prudence.
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