The December CPI Report came out an hour ago and the market is gyrating wildly as it tries to interpret it and price it in.
The somewhat technical blog I wrote yesterday about headline vs core vs “supercore” CPI is the key to understanding the market reaction. While the headline numbers came in dovish at -0.1% MoM and 6.5% YoY, the core continues to remain elevated – though perhaps not the “supercore”.
The Core CPI – which excludes food and energy – rose 0.3% MoM and 5.7% YoY. I think investors would feel a lot more comfortable if the month over month number was 0.2%. Similarly Core Services rose 0.5% MoM and 7.0% YoY. That 0.5% is going to concern some people. It feeds into the narrative that the job market remains too hot leaving consumers flush with income and pushing up services prices – and that until the job market cools the Fed can’t relent.
However the “supercore” – core services excluding shelter – appears to have continued its downward trend – as you can see in the tweet above by Liz Ann Sonders – which suggests that contrary to what I just wrote underlying services inflation is starting to cool along with goods inflation. As I suggested in yesterday’s blog, core services inflation excluding shelter may be the key data point – and it looks good.
One thing to note is that the market ran up in the days leading into the report as investors positioned themselves for a dovish print. That’s why I sold half the ARKK Jan1323 $36 Calls I bought on Monday – and recommended in this blog – yesterday for a 250% profit to lock in a win. (Even if the other half expires worthless we’ll still make money). So we needed an unambiguously good number for the market to keep rallying.
It will be interesting to see how the market sorts out the various components of the report today but I think that – contrary to expectations – there may not be a big move in either direction.