For the last few quarters, we have highlighted the rising probability that inflation would reverse its downward trend in the fourth quarter, resulting in rate cut expectations being pushed out. On Thursday we will get an update on the Consumer Price Index and while the base effect setup is pointing toward another y/y deceleration, U.S. Treasury yields and the U.S. Dollar Index have been heading higher. Typically, we would expect those market signals to move in the opposite direction if inflation was going to continue slowing. Looking beyond the September print, we will be watching to see if rates, the U.S. Dollar, and other market-based signals front-run higher inflation prints that could likely lead to a downshift in rate cut expectations and ultimately FOMC policy decisions.
Sticking to our process, we will run through similar data that we posted on the day of the last FOMC meeting.
- Fed Funds Futures
- Roughly one full rate cut has been taken out over the last week, with November now sitting at -21 basis points
Source: Bloomberg
- U.S. 2-Year Treasury Yield
- Up 45 basis points from its low on September 24th
Source: Koyfin
- U.S. 10-Year Treasury Yield
- Up 42 basis points from its low on September 16th
Source: Koyfin
- U.S. Dollar Index (DXY)
- Up 2.3% from its low on September 24th
Source: Koyfin
- Shelter Contribution to CPI
- Rose sequentially for the first time since March 2023
- Sticking around 1.9 percentage points does not leave much room for error if other components of the index do not deflate
Source: Macrobond
- WTI Crude Oil
- September is the last tough y/y comparison in end-of-month average terms
- Through the first eight days of October, the end-of-month average is $73.12, putting the y/y growth rate at -14.4%, a sequential acceleration from -22.4% in September meaning it should subtract less from CPI
Source: Macrobond
- The Energy Select Sector SPDR Fund (XLE)
- Up 8.3% from its low on September 11th
Source: Koyfin
- London Metals Exchange Index (LME)
- Up 11.8% from its low on August 7th
Source: Koyfin
- Invesco DB Agriculture Fund (DBA)
- Up 9.5% from its low on August 1st
Source: Koyfin
- 5-Year Breakeven Inflation Rate
- Up 31 basis points from its low on September 10th
Source: Koyfin
Our takeaway from the data above is that A. CPI components outside of Shelter likely need to disinflate/deflate to reach and maintain the Fed’s 2.0% target, B. Most of the leading market-based signals we monitor have not been moving in a direction that would suggest inflation is going to slow meaningfully following the September release, and C. These dynamics could lead to rate cuts being pushed out. We will continue to provide updates on this setup as new information becomes available.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Investment Strategist
Boyd Watterson Asset Management, LLC