12 Jan CPI AT 8:30
Equities, led by the technologies and energy climbed after FRB Chair Powell reassured all that the Fed is going to tamp inflation as the economy rebounds, while signaling the central bank will probably start to shrink its balance sheet in 2022.
The Chair stated the “Fed will not hesitate to act if needed to contain price pressures, and if we have to raise interest rates more over time we will.”
The market interpreted Powell’s testimony as more dovish than expected, hence the advance. Treasures were essentially unchanged.
Speaking of Treasuries, Bloomberg reports there will be a $2 trillion drop in central banks’ net demand, stating rhetorically the markets will soon find out how much private demand for sovereign debt exists.
Oil rose about 4% yesterday. The initial catalyst was the seventh consecutive decline in inventories, a frigid forecast in the Northeast and the advance in equities. Later in the day the narrative began to change, focusing instead on the ongoing disruptions from both Libya and Kazakhstan, interpolating Russian involvement in its the former satellite as a precursor as to what may occur in Ukraine.
It is largely accepted the world does not have excess capacity because of the lack of workers, infrastructure and capital in the tier II and III OPEC members.
Today the CPI is released. Consensus is expecting a 7.0% headline rate, 5.4% ex food and energy. The Minutes from the December Fed meeting explicitly stated concerns about Owners’ Equivalent Rent (OER) or what someone can rent their home for if it was indeed rental.
OER is about 32% of inflationary indices and has remained remarkedly “well anchored” as housing and rental prices has surged. Is this about to change?
Many, me included, thought OER would by now have become a major topic of discussion. Will it follow the same path as the Labor Participation Rate (LPR), a key measurement of employment that few followed, much less knew anything about, until several months ago?
Last night the foreign markets were up. London was up 0.57%, Paris up 0.32% and Frankfurt up 0.18%. China was up 0.84%, Japan up 1.92% and Hang Seng up 2.79%.
The Dow should open flat ahead of the CPI. All are bracing for the worst reading in almost 40 years. Oil is up another 1% to almost $82/barrel. The 10-year is off 2/32 to yield 1.75%.