Searching for divergence
February 29, 2024
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–PCE prices today. M/M headline expected +0.3 from +0.2 last and Core +0.4 from +0.2. Yoy expected 2.4 from 2.6 with Core 2.8 from 2.9.
Regarding inflation, the Bureau of Labor Statistics sent out a note to ‘Super Users’ yesterday which contained this line:
The weights for single family detached homes increased materially from December 2023 to January 2024. All of you searching for the source of the divergence have found it.
–From the BBG article on this story:
The pop in owners’ equivalent rent was a major factor behind the strength of the overall January CPI figure — which was published on Feb. 13 — given its outsize weight in the index. The higher-than-expected CPI numbers have been cited by Federal Reserve officials as a reason to delay widely anticipated interest-rate cuts.
–Regarding the pace and magnitude of expected eases, Williams said yesterday that we have a ways to go to reach 2% inflation, and that three cuts in 2024 is a reasonable starting point. Collins sees “methodical” and gradual easing. I think that’s the key message from the Fed: ‘methodical’. Almost on auto-pilot going into the craziness of the election. Powell will have a chance to hone the strategy next week, beginning with testimony in the House on March 6. Employment data released March 8.
–Yields eased yesterday with tens down 4.7 bps to 4.266%. On the SOFR strip reds (2nd year out) contracts were the strongest, settling +6.75. SFRZ4 settled +7 at 9551.5 near 4.5%, consistent with three cuts by year end and more to come in 2025. However, rate futures are lower this morning, going into PCE price data; near the lows of the move. SFRZ4 currently prints 9546, -5.5, very close to last week’s low of 9544.5. Feels to me more like long liquidation rather than new shorts pressing the narrative of near-term inflation acceleration. Open interest fell across the treasury curve, though that’s mostly related to the roll.
–Volume was light yesterday; option trades were mainly premium sales.
