Will plunging oil prices take the wind out of inflation?

Published Date 11/14/2018

The bond and mortgage markets opened weaker this morning. We were looking for the 10-yr to confirm additional improvements if it could hold yesterday’s 3.14% (-3 bps) and a key technical resistance. There's a lot of day ahead but at 8:00 am ET the 10-yr at 3.16%, up 2 bps, and MBS prices are generally unchanged from yesterday’s closes. Oil prices so far are trading better after 12 sessions of huge declines on more oil on the market.

At 7:00 am we saw more weakness in MBA weekly mortgage applications; down 3.2%, purchases down 2.3% while refinances slipped 4.3%. Purchase apps are at their lowest level since Feb 2017; refinances are the lowest since Dec 2000. Unadjusted purchases continued to decline, with yr/yr down 3.0%, the lowest since this time last year. The refinance share of mortgage activity rose 0.3 percentage points from the prior week to 39.4%.

At 8:30 am the October consumer price index hit forecasts of +0.3%; core CPI added +0.2%, also as expected. Both the overall and core CPI data are higher than in September (overall +0.1%, core +0.1%). Yr/yr CPI added +21.5% from 2.3% in September; core yr/yr +2.1% but better than 2.2% in September. The October CPI led a 3.0% rise in gasoline prices, but when we get November’s data, there should be a big decline given the massive decline in oil that is leading gas prices down substantially. Housing is the dominant component in the consumer price report, and here price pressures are also moderate, especially for rents which rose only 0.2% and also for homeowners, where the reading for owners' equivalent rent rose 0.3%. Medical services are also an important component, and here the story is the same —up only 0.2% with both physician services and hospital services unchanged in the month. Housing does show a little yearly pressure at a 3.2% gain overall which, however, is the lowest reading since February this year. Today's report and the outlook for the next report for November may increase criticism of the Federal Reserve which is raising interest rates to protect against inflation; although CPI doesn’t take into account wage growth that the Fed believes will increase (as noted yesterday we don’t expect wage increases to be as strong as the Fed and markets think).

At 9:30 am, the DJIA opened up +192, the NASDAQ added +70, and S&P added +20. The 10-yr note was at 3.16%, +2 bps.

Oil erased losses amid renewed speculation that OPEC and its allies are considering curbing supply next year. OPEC and its partners are discussing a reduction of as much as 1.4 million barrels a day, deeper than the cut proposed earlier this week. Oil has fallen sharply from the four-year high reached in early October when the US allowed waivers for seven countries to continue buying oil from Iran. While oil has always been a volatile commodity, oil experts have a history of over-reaction to supply/demand ratios. It was in September when crude was touching close to $80.00, and more oil experts and traders were calling for $100.00/barrel.

Alan Greenspan was interviewed about inflation on Bloomberg television’s “The David Rubenstein Show: Peer-to-Peer Conversations” and said, “I’m beginning to see the first signs of it. We’re seeing it basically in the tightening of the labor markets first, which, as you know, have gotten very tight now. We’re beginning finally to see average wages rise, and clearly there’s no productivity behind it.” Greenspan said a lack of productivity growth meant “you’re getting into a system now which has no outcome that’s in equilibrium other than inflation and no productivity growth.” He also warned that rising U.S. debt levels could undermine the economic expansion; “You can’t have a tax cut without finding the revenues elsewhere, or you run into problems.” He believes cuts are necessary on Social Security, Medicaid, and Medicare, but it’s unlikely Congress and the administration can get that accomplished.

Brexit is moving closer to a decision. China/US trade talks are continuing; moving closer to the G-20 meeting at the end of this month where Trump and Xi are expected to meet face to face.

There is basically nothing left on the calendar; Jerome Powell is scheduled to speak at 5:00 pm this afternoon after markets close.

Source: TBWS

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