Inflation in December dropped to its lowest level since 2021

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Published Date 1/26/2024

Prior to 8:30 am ET data the bellwether 10 year note traded unchanged at 4.12%.

At 8:30 am December inflation on the PCE; month/month expected +0.2% reported +0.2% but up from -0.1% in November, year/year +2.7% increased just 2.6% unchanged from November; the core PCE month/month estimated at +0.2% reported +0.2%, but up from +0.1% in November, year/year forecasts 3.0% reported at 2.9% but down from 3.2% in November. The mild 0.2% increase on core PCE inflation for December marked the smallest monthly increase for consumer prices since the spring of 2021. The PCE price index annual change has cooled from 5.4% in December 2022. The inflation confirms no rate increase next week, which has been a given; not likely a cut in March and less belief Fed cuts may not occur until way in the summer. The economy continues to grow, although slower than last year, employment remains strong, consumers defying the idea of slowing down.

December personal income increased 0.3% as was thought, personal spending month/month +0.7%, stronger than +0.4% estimates. The strong spending adds more evidence consumers are not pulling back, adding to yesterday’s Q4 strong growth (+3.3% with forecasts at 2.0%). Strong spending is coming from car sales, drugs, health care and is driven by higher income families while the lower income levels still suffering with high interest rates, housing costs and food costs. Some calling the data at 8:30 am a goldilocks moment, consumer spending is strong and core inflation is moving toward the 2.0% target.

The initial reaction to the better inflation was not much, by 9 am the 10 year note yield 4.11% down 1 bp from yesterday, MBS price 3 bps better than yesterday.

At 9:30 am the DJIA opened -27, NASDAQ -23, S&P -1. The 10 at 9:30 am 4.14% +2 bps. FNMA 6.0 30 year coupon at 9:30 am -6 bps from yesterday and +9 bps from 9:30 am yesterday.

At 10 am December pending home sales, estimates +1.3% reported +8.3%; details this afternoon.

The 10 year note technically has found resistance at 4.20%, support holding rates in check 4.05%. Two weeks trading in the narrow range. The short term 9-day relative strength index still above the pivot at 50, over 50 suggests negative outlook but it is a very short near-term measurement. Not expecting much change for the remainder of the day; too much out in front next week with FOMC, December employment data, Q4 employment cost index, and University of Michigan consumer sentiment data.

Source: TBWS

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