October CPI Runs Hot
October CPI came in slightly hotter than expected, driven by energy. Headline month-over-month CPI rose 0.4%, a tenth above the expected 0.3%. There is no year-over-year reading because the government was shut down a year ago, so no comparison exists. Core CPI rose 0.3%, also a tenth hotter than expected. Futures dropped on the news.
The detail showed a steady climb across the board, led by energy. Energy rose 0.7%, gasoline 1%, electricity 0.9%. Food was elevated at 0.5%, with food at home up 0.4% and food away from home up 0.5%. New vehicles rose 0.2%. Used cars and trucks fell 1.2%, a welcome drop after rising the month before. Shelter rose 0.3%, owner's equivalent rent 0.3%, rent 0.2%. Motor vehicle insurance rose 0.7% and recreation 0.8%.
Given crude oil climbed through October, a lower energy-driven number was never likely. Expecting a better print was naive. A slightly worse number was the reasonable call, and that is what arrived.
The Rate Hike Debate
Christopher Waller, speaking in London, said he would favor a 25 basis point rate hike and possibly a 50 basis point hike. His comments came out a bit early. Combined with the hot data, this pushed futures from positive to negative and got people leaning toward 50 basis points. The odds of a 50 basis point move for December rose to 15%.
I call this overreaction theater. Everyone already expected a rate hike in December, so the hike itself was no surprise. The jump to 50 basis points is what moved markets, and I do not think 50 will happen, especially with crude oil down sharply. For that lower-inflation path to hold, crude needs to stay down.
The Crude Oil Wild Card
Here is the key timing point. On October 30, the end of the month the CPI measured, crude oil futures closed somewhere between $103 and $104. Crude now trades around $84.70, a full 20 points lower. That raises the question: is the CPI data stale? The market is acting like it is not - the data is the data. But a trader has to consider that the next inflation reading, due before the next Fed meeting, could show a sharp drop in energy prices and CPI.
Crude has gone straight down since the end of the month, hitting an overnight low of 83.88 and working toward serious levels. The driver is President Trump. After the elections, his focus on energy prices has him pushing to deescalate tensions between the US and Iran, with renewed attacks called unlikely. Crude trades on one of two words at any moment - escalating or deescalating - and the move is clearly toward deescalating, which pressures prices and lowers future inflation expectations.
The supply and demand picture backs further downside. The world is flush with crude supply, so the supply side holds the advantage. If US-Iran tensions keep easing, crude could fall further. Supply disruptions are what have kept prices higher, and they still happen. Crude oil will be interesting to watch over the next couple of months.
Watch CoreWeave
CoreWeave (CRWV) reports today after the bell. The stock has been extremely volatile and is down about 54% over one year.
