Cooler Inflation Mixed With Strong Labor Data Leaves Traders Puzzled


Inflation data slowed in December, as widely expected, but labor market data remained strong, with both initial and continuing claims coming in lower than expected. Wall Street struggled to weigh how each would affect future rate hike decisions for the Federal Reserve.

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(Bloomberg) — Inflation data slowed in December, as widely expected, but labor market data remained strong, with both initial and continuing claims coming in lower than expected. Wall Street struggled to weigh how each would affect future rate hike decisions for the Federal Reserve. 

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In premarket trading and then at the open, the S&P 500 Index struggled for direction, while two-year Treasury yields fell. 

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“Even though everything is coming in line with expectations, equities are still disappointed because people were expecting a below-expectations CPI report, and that didn’t happen,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.

“The easy part of the decline in inflation may be underway — goods inflation is declining, commodity prices are falling,” Priya Misra, global head of rates strategy at TD Securities told Bloomberg TV. “The much harder part is getting that service inflation down consistent to 2%.” 

Here’s what others on Wall Street said:

Danni Hewson, financial analyst at AJ Bell:

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“The trouble with US inflation numbers coming in bang on target is that markets had been surfing a wave of optimism that the numbers might just come in even cooler. And when you poke under the hood a little more, it’s clear a lot of the movement is down to falling prices at the pump.”

“Markets are likely to have a hard time figuring out how to react to today’s numbers, because although the headline is a good one there are still big issues to contend with, not least continued rises in the cost of food and shelter but also the fact that services are running hot. And when you mix in the latest jobs data there’s plenty to befuddle.”

Cliff Hodge, chief investment officer for Cornerstone Wealth:

“The CPI report was bang-on this morning, and while the initial reaction in risk assets was weak, futures are moving higher.”

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“The labor market is still very tight, though the claims data should be taken with a grain of salt due to the noise in holiday adjustments.”

Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management:

“The market has priced in a very optimistic scenario about CPI in the previous days. The numbers came in at exactly the expectations level. That means that some of the optimism in the markets may get unwound both in equities and fixed income.”

“While a 25bps hike in the next Fed meeting is still in play, the strength of housing in the core CPI and the benign jobless claims support the scenario of a 50bps hike in the next meeting. However, what matters most for the markets is the terminal Fed rate, not so much the pace of hikes. As we get closer to the terminal rate, the pace of hikes needs to slow down.”

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Mike Bailey, director of research at FBB Capital Partners:

“This is the number one pain point for Jay Powell, and we now have two big data sets suggesting that wages are fading. In some ways, today’s CPI is scratching that itch, and Powell may decide to gradually pull back on tightening.”

Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:

“The CPI data could motivate the Fed to make smaller amendments to their path and go toward a slower tightening. Anyway, the market will give another name to the monster in the closet, talks about possible recession will take over.”

Dennis DeBusschere, founder of 22V Research:

“Rents went up month over month. And new lease turnover is crashing. Rents will fall. We know that. So the OER will be faded. Bottom line: internals or the things the Fed are focused on are better than the headline CPI reading.”

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Lindsay Rosner, multisector portfolio manager at PGIM Fixed Income:

“Shelter still remained high, but forward probabilities of hikes haven’t budged. This was a number that worked for market expectations.”

Timothy Graf, head of macro strategy for EMEA at State Street Bank & Trust:

“This is continued decent news in terms of the broader inflation trend, but that the stickiness in shelter-related inflation and services inflation means inflation here isn’t coming down fast enough for the Fed’s liking.”

“The Fed should have reason to step down to 25bps at some future meeting and then pause shortly thereafter. I think what this number does is probably extend that time horizon a bit.”

John McClain, portfolio manager at Brandywine Global:

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“The risk-reward was highly skewed going into the print, with the market heavily leaning toward a weaker print. While we are moving in the right direction, the markets euphoria will take a pause for a cup a coffee. The data gives the Fed another point of reference and probably won’t dissuade them from their current thinking.”

Ipek Ozkardeskaya, senior analyst at Swissquote: 

“Moving forward, inflation will probably not ease steadily, and smoothly throughout this year, as the Chinese reopening, and the rebound in energy and commodity prices as a result of it, hint at a bumpy ride. If the Fed officials don’t want to call victory prematurely, they could be tempted to hike by another 50bp in February.”

Andrea Tueni, head of sales trading at Saxo Banque France:

“Now the market will need some kind of fuel if it wants to continue to go higher.”

—With assistance from Lu Wang, Macarena Muñoz, Julien Ponthus, Liza Tetley and Emily Graffeo.

(Updates with comments from Hewson, Graf and Ozkardeskaya)



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