Headline inflation undershot expectations for the first time in 11 months and only the third time in the last two years.  It is unsurprising that Federal Reverse expectations have recalibrated toward 50 bps next month, essentially unwinding the payroll repricing.

As noted last week some were beginning to suggest a rare intermeeting interest rate may occur, the first since 1994.  Moreover, it was also a for gone conclusion a 75 bps was all but inevitable in September.

This “recalibration” ignited a rally across almost every asset group.  It is expected that August’s report will also be “relatively soft” given the recent drop in gas prices and other commodities.

However, inflation, specifically the Fed’s preferred measure of inflation the PCE (Personal Consumption Expenditure Index) is expected to be around 6.1% in December on a 12-month basis, over three times higher than the Fed’s speed limit of 2%.

OER which comprises about 32% to 35% of inflation indices, rose 0.5% from June and 5.7% from last year, the most since 1991.  It is believed that combination of rising OER ad elevated wages that are beginning to seep into services inflation, the core CPI could top 7% versus the current pace of 5.9%.

As inferred, yesterday’s advance could be viewed as algorithmic based, illiquid advance predicated upon a positive CPI surprise which is perhaps empty given the trends that are becoming even more entrenched.

What will today’s PPI suggest?  The headline rate is expected to be 10.4% and a 7.7% core rate.

Last night the foreign markets were mixed.  London was down 0.34%, Paris down 0.20% and Frankfurt down 0.04%.  China was up 1.60%, Japan down 0.65% and Hang Seng up 2.40%.

Dow futures are up 0.4% and NASDAQ futures are flat ahead of the PPI and Disney’s upbeat profit report.   The 10-year is up 1/32 to yield 2.78%.


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