Market Shrugs at Mixed October CPI Numbers

Nov 13, 2019
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The monthly CPI releases are usually met with anticipation given stable prices are one of the Fed’s two mandates. However, after the last FOMC meeting the Fed transitioned from cutting rates to a patient pause stance and as a consequence the October CPI release doesn’t carry the weight that other inflation reports did back when the Fed was active in the rates market. Be that as it may, the October report had a bit of a mixed message. Overall CPI gained 0.4% (actually 0.356%) versus an unchanged reading in September and 0.3% expected. Higher energy costs drove the bulk of the increase and the monthly gain bumped year-over-year CPI from 1.7% to 1.8%. Core CPI (ex-food and energy) was more in line with expectations gaining 0.2% (actually 0.157%) versus 0.1% in September. Moreover, the year-over-year rate dipped to 2.3% after two straight months at 2.4%. The generally stable YoY prints allow the Fed to remain in pause mode with the primary drivers of future rate policy being the outcome of trade talks with China and the results of the holiday selling season. In that regard, the Fed will have the holiday retail sales numbers by the first 2020 meeting on January 30th, and if they’re strong, and a deal of some sort has been negotiated with China, the pause may extend well into 2020.

 


newspaper icon  Economic News

 

 

While we’ve downplayed the significance of today’s CPI release, there are several issues that we think will carry some real weight in the Fed’s future rate policy deliberations. Some of those issues are discussed further below:

  • First and foremost are the ongoing trade talks with China. Most observers think a Phase One deal will be agreed to shortly. While the equity market took off last week on word that the U.S. would dial back tariffs to get to yes, the White House squelched those rumors late last week, the perception remains that some type of deal is near.
  • The second issue, and related to the first, is that the market is realizing that a Phase One deal is likely to resemble more  of a cease-fire than a real trade breakthrough. Thus, the economic impact will be minimal but psychologically beneficial.
  • The rebound in equity markets has been due, in part, to the gathering belief that the global slowdown is showing signs of stabilizing, if not reversing. Some recent numbers out of China and Europe, while still pointing to difficulties, have been better than expected. The old saying, “you have to stop going down before you can go up” applies here.
  • If a trade truce is accomplished and economic signs continue to reflect a bottoming of sorts in the global economy, business confidence may improve and thus increased business investment will follow. Recall the domestic economy has been carried this year by the consumer while net exports and business investment have subtracted from GDP growth.
  • An improving business sector and net exports, along with consumer consumption following recent trends, will be enough to move GDP smartly over 2% and that could shift the Fed’s patient pause back to a tightening posture.
  • Given the market volatility endured this time last year, and especially after the Fed’s ill-advised December 2018 rate hike, any shift to a tightening posture will be a slow, deliberative process. If inflation remains somewhat docile that will give the Fed room to remain patient.  Thus, even if we get a broadening out of economic strength discussed above, the Fed could very well spend most of the year on the sidelines.  On the other hand, if the broadening out doesn’t happen expect the Fed to shift back to an easing posture at some point in 2020.

 


line graph icon  Year-End Funding Opportunities in the Brokered CD Market

 

With memories fresh in the minds of many of the September quarter-end market volatility in the repurchase funding arena, thoughts now turn to the bigger liquidity sapping event of year-end. In addition, with the recent rally to new all-time equity highs, thoughts are coalescing around the idea that the slowing in the global economy may have stabilized. If that is indeed the case loan demand at your institution may be on the verge of expanding again as well.

 

If you’re concerned both about increasing loan demand and potential liquidity concerns over year-end the brokered CD market is currently offering funds at attractive yields. The chart below compares brokered CD funding across various maturities compared to other typical funding sources, like FHLB advances. As the green highlighted cells attest compared to the FHLB-Atlanta brokered CDs offer more attractive funding from three months through ten years. If you’re needing liquidity for anticipated loan demand, or merely wanting more of a buffer prior to year-end, contact your CenterState Bank representative to explore your options further.

 

Investment Recommendations

 

 


bar graph iconAgency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 1.82 1.92 2.01 2.11 2.49 2.75
0.50 1.75 1.85 1.95 2.06 2.45 2.71
1.00 1.65 1.76 1.86 1.97 2.36 2.62
2.00 - 1.62 1.71 1.81 2.24 2.46
3.00 - - - - 2.12 2.36
4.00 - - - - 2.02 2.29
5.00 - - - - 1.93 2.22
10.00 - - - - - NA

 

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