Morning Brief – US CPI Main Event

Markets are on high alert as the US release of the October CPI report is scheduled to be released later. Consensus expectations are for the headline CPI to print at 8.0% YoY, with the Core CPI reading expected at 6.5% YoY.

The headline CPI for October is expected to be 8%, while the core rate is expected to be 6.5%. The risk is that the prints come out higher than expected and high inflation lingers. The Fed said the terminal rate will be higher than previously expected. 

The September headline inflation was 8.2% YoY, higher than expectations of 8.1% YoY, however, lower than the August reading of 8.3% YoY. The Core CPI reading was higher than expected at 6.6% YoY vs expectations of 6.5% YoY and an August reading of 6.3% YoY. Marking the highest reading since 1982. 

The relief from higher prices at the pump ended in October, as prices climbed into mid-month, with OPEC+ announcing supply curtailments. Combined with broad price pressures in other categories, the total CPI likely accelerated to 0.7% on the month, leaving the annual rate of inflation lower at 8.0%.

Excluding food and energy, core prices likely remained heated with a 0.5% gain on the month, reflecting continued pressure in the shelter price index as leases reset at higher rates, lagging housing market developments.

High demand for other services likely added to that pressure, however, some easing in core goods prices could have been masked by the headline, as industry gauges of used car prices have fallen along with the fading of supply chain issues in that sector.

Economists at Bank of America think housing will again be the primary driver of October’s core reading, as housing costs comprise nearly one-third of the basket for consumer price inflation.

Goldman Sachs was the first among big banks in the days leading up to November’s FOMC meeting to warn rates may rise as high as 5% by March 2023.

After Friday’s job report, economists at Bank of America upwardly revised their projections to a terminal rate of 5.0-5.25% from 4.75-5.0% and said the institution anticipates a 0.50% increase for December.

TD Securities lifted its terminal rate forecast from a range of 4.75%-5.00% to 5.25%-5.50% and sees a 50-basis-point hike at the next meeting on Dec. 13-14. BNP Paribas expects a fifth 75-basis-point increase next month and a terminal fed funds level of 5.25% in the first quarter of next year.

I think that the upcoming print for CPI inflation today and the November employment report will weigh heavily on the near-term path for Fed policy, so markets are likely to react strongly today to the headline number.