Market 12/12: CPI report as expected keeps market stable

30Y US Treasury bond auction positive: foreign investor demand leads

Today's US Treasury bond auction results quite successful:

Highest accepted yield (High Yield): 4.344% (lower than market yield: 4.347% and previous auction: 4.769%).
Total value of successful auction: USD 21 billion.
Bid-to-Cover ratio: 2.43 (higher than previous auction 2.24%
However, up to 68.4 % foreign investor trades accepted (Indirect Bidder).

=> Demand for long-term US T-bond reserves in international market still quite high!

Read more about how to read bond auction results here.

CPI continues downward trend though slowdown pace still quite slow

November CPI , up +0.1% M/M, equivalent to increase +3.1% Y/Y, slowing from +3.2% Y/Y in October.

Core CPI up +0.3% M/M (as expected), +4.0% Y/Y - unchanged from October data.

The most troubling issue for the Fed is CPI supercore (core services CPI excluding housing) up 0.5% M/M and 4.08% Y/Y (back to increasing above 4%).

CPI analysis by main categories:

Core Services CPI at +3.1% y/y - still the main category keeping inflation high.
Energy prices slightly down: -0.431% y/y

Transportation services unexpectedly surge compared to previous month:

Used car and truck prices +1.6% m/m in November - first increase since May 2023.

Housing prices are the largest component driving core CPI M/M increase.

Housing CPI up 0.4% in November, after 0.3% previous month.
November rent prices up 0.5%.
Housing price inflation slowing:
- House price inflation: 6.51%, down from 6.72%, lowest since August 2022
- Rent inflation: 6.87% down from 7.18%, first time below 7% since August 2022

However, in reality, rental prices have been much lower (indicating that CPI will decrease further next year).

Actual Consumer Price Index reached a record high this month - up 17.5% since Biden became president.
- This index only increased 8% during former President Trump's 4-year term.

Compared to the same period last year, the growth of the airfare component is still in deflationary territory.

FYI: average real hourly earnings increased 0.5% from the same period last year in November…

The increase in real income could prolong inflation persistence as high income drives high consumer demand (wage price spiral).

It can be seen that M2 money supply and CPI are correlated → CPI is likely to continue declining following M2.

The market is pricing in over 40% chance that the Fed will cut interest rates for the first time at the March 2024 meeting.

Small business optimism index slightly down

NFIB small business optimism index for November slightly down to 90.6 (from 90.7 last month).

Labor quality continues to be the most important issue for small businesses.

Inflation remains the second most important issue, but the level of concern has dropped sharply compared to last year

Janet Yellen's statement: conflict of objectives between Treasury and Fed

US Treasury Secretary Janet Yellen said on Tuesday:

Inflation is declining, the economy continues to operate at full employment.
There is no reason why inflation won't fall to the Fed's target level.
High interest rates for an extended period will put pressure on fiscal policy

It can be seen that the Fed and Treasury have conflicting objectives:

Treasury: worried about the fiscal deficit issue, especially as US public debt is at a very high level
- The Treasury wants the Fed to cut interest rates as soon as possible → bond yields decrease → government pays less interest on its debt
Federal Reserve: cannot cut interest rates too early if the labor market remains at full employment (because people with higher income will increase spending → pushing inflation back up).

Has US crude oil production peaked?

US oil production is at a record level, higher than any other country.

This has caused retail gas prices to be at the lowest in 11 months and could fall below 3 USD for the first time since 2021

Producers themselves are increasing long positions in crude oil Futures contracts (green column) — raising market concerns about a stall in oil production and higher oil prices ahead:

Update on Oracle's Q2 FY24 earnings

Revenue: 12.9 billion USD, +5% Y/Y, below expectations by 110 million USD
Non-GAAP EPS: 1.34 USD (above expectations by 0.01 USD)
Dividend: 0.4 USD/share (unchanged)
Cloud computing segment revenue +25% Y/Y to 4.8 billion USD:
- Software as a Service (SaaS) +15% Y/Y to 3.2 billion USD
- Infrastructure as a Service (IaaS) +52% Y/Y to 1.6 billion USD