U.S. core CPI came in hot for the third straight month, up +0.3% month-over-month (MoM) versus +0.2% expected, while headline CPI was also higher than anticipated, up +0.4% MoM vs. +0.3%. No year-over-year comparisons were available for this release given last year’s U.S. government shutdown.
Services and shelter were the culprits in the October print. Shelter rose by +0.3%, led by owners’ equivalent rent (+0.3%) and lodging away from home (+0.6%). Services (+0.8%) were up, driven by a sharp increase in transportation services (+0.8%, read: diesel prices) as well as a notable pickup in recreation (+0.8%). Motor vehicle insurance (+0.7%), hospital services (+0.8%), and airfares (+0.4%) also contributed to the hot print.
Energy prices (+0.7%) were up in the month, but admittedly this reflected moderation from September’s +5.2% MoM gain. Food (+0.5%) surged, however, as both food at home and food away from home were pricier in October. The only significant area of improvement noted in the report was decline in used cars and trucks (-1.2%).
The momentum for a December hike was already growing following the October pause; this release should act as an accelerant to that trend. Perhaps, more importantly, the combination of a pause, hot data, and Fed Governor Christopher Waller’s float of a 50 basis points hike in December have translated to both a narrative shift and a flattening of the yield curve. Once considered extraordinary, hikes of more than +0.25% are now viewed as part of the Fed’s arsenal, and, given the commitment to responding to the data released in this “information rich” period, the threat of Fed Chair Kevin Warsh wielding that tool is higher.
Market reaction to the report was hardly surprising. The probability of a 50 basis point hike in December rose from 0% to 15%, translating to a flattening of the yield curve as the 2-Year Treasury rose by almost +0.20% while the 10-Year Treasury was up by only +0.13%. Stocks fell as well in early trading, led lower by technology stocks, but rebounded quickly. The complication in the current environment is this conundrum: the threat of higher rates to combat inflationary pressures could be offset by a relative slowdown in the AI buildout, particularly given the growing political pushback on data centers, as this buildout is part of the inflation story. But either of these may put pressure on technology and AI-adjacent names in the near-term. We remain focused on both sides of this coin, as well as with the continued elevation in energy prices because of the ongoing conflict in the Middle East; but with the economy remaining strong, we recommend reviewing allocations and putting cash to work during this period of volatility.
