Market Note – December 17, 2024

By Hightower Great Lakes on December 17, 2024

What to Make of November Inflation

Last week, markets received updated inflation data for the month of November. The Consumer Price Index (CPI) came in line with expectations at 0.3% m/m and 2.7% y/y, while the Producer Price Index (PPI) was hotter than expected in November, coming in at 0.4% m/m and 3% y/y.

Breaking down the CPI report, owners’ equivalent rent (OER) rose just 0.23% in November from the month before, the lowest monthly change since January 2021.

OER makes up approximately 25% of CPI and has been a big reason for the stickiness of inflation over the past number of months. Rent prices are cooling; the median rent asking price was $1,595 in November, the lowest since March 2022.[1]

Rent prices have decreased for 19 consecutive months, and the further cooling of price pressure across housing will support a continued decline in inflation.

Chart 1: Housing Contribution to Headline Inflation in November Was the Lowest Since Early 2021[2]

November PPI was a different story; the 3% y/y reading was the highest since February 2023 and six of the last seven reports have been revised higher.

Services have been the main driver of continued inflation, and recent readings have been coming in cooler than in previous months. Services rose 0.2% m/m, relative to goods inflation of 0.7% m/m.

Within goods, one quarter of the 0.7% rise was attributable to a 55% m/m gain in the price of eggs. If price increases become wider spread outside of a few everyday items, increased price levels across consumer goods could once again become a concern.

Inflation is likely to stay higher in the interim but that is tied to the many tremendous fiscal policies put in place, which as a result have led to above-trend GDP growth.

The Atlanta Fed GDP tracker is running at an annualized rate of 3.3% in the current quarter. Although inflation is higher than the Fed prefers, growth is above trend as it has been for the past two years.

Awaiting the Fed Decision

Markets are expecting the Fed to cut interest rates by 25 basis points (bps) this Wednesday. The probability of a 25 bp cut jumped 15% to a near 100% chance following November’s CPI report last week[3].

While the cut is given, what is not given is the rhetoric Fed Chair Jerome Powell will express during the press conference. Expectations are for a more hawkish tone due to recent strong economic data, a stable labor market, and a slightly hotter inflation reading.

Powell is likely to note that the committee is committed to its dual mandate and will let the data lead the group’s policy decision.

We find it likely that this will be the last cut from the Fed in the short term, and they will reassess the economic outlook in 2025. The next Fed meeting is on January 29, 2025; as of December 13th, markets are putting the probability of a hold at 81% and the probability of a 25 bp cut at 16%.

A 25 bp raise is extremely unlikely, but investors think there is a non-zero probability, at a 2.4% chance.[4] Powell’s sentiment will be a major indicator of the Fed’s outlook and likely plan for January, and our team will be attentive to the decision.

Fixed Income

U.S. Treasury yields rose across the curve last week due to the accelerating inflation data across November CPI and PPI reports; the 2-, 10-, & 30-year rose 14, 24, & 27 bps, respectively.

The 10-year’s 24 bp yield increase was the largest weekly upward move since October 2023. Tax-exempt yields followed Treasuries albeit at a slower pace, with yields rising 9-17 bp across the curve.

Investment Grade and High Yield spreads each tightened 2 bps to +116 & +308, respectively. For the fifth week in a row, U.S. credit ratings deteriorated as the main rating agencies issued 35 downgrades and 28 upgrades.

Investment Grade corporate bond ETFs had another week of strong flows as they pulled in $2.5 billion after collecting $2.8 billion the week before, 4x the 13-weekly average of $630 million. For the first time in 18 calendar weeks, Muni ETF flows were negative.[5]

The Week Ahead

Earnings – Tuesday: AMTM; Wednesday: GIS, JBL, MU; Thursday: ACN, CAG, CTAS, DRI, FDX, KMX, LEN, LW, NKE, PAYX.

Economics – Monday: PMI Manufacturing, PMI Services; Tuesday: Retail Sales, Industrial Production, Manufacturing Production, NAHB Housing Market Index; Wednesday: Housing Starts, Housing Completions, FOMC Meeting; Thursday: Q3 Final GDP, Initial Claims, Existing Home Sales; Friday: PCE, Core PCE, Michigan Sentiment.  

Return for Selected Indices^[6]

Click here to read last week’s Market Note (12/10).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Redfin. As of December 11, 2024.

[2] Source: BLS. As of December 11, 2024.

[3] Source: CME Group. As of December 13, 2024.

[4] Source: CME Group. As of December 13, 2024.

[5] Source: Bloomberg. As of December 16, 2024.

[6] Source: Bloomberg. As of December 16, 2024.