Financial markets set up the next trade to fade the iShares 20+ Year Treasury Bond ETF (TLT). Stocks rallied (the S&P 500 gained 1.8%) and yields fell (TLT jumped 1.7%) as negative sentiment going into the December, 2024 CPI report was just barely low enough to set up a sharp relief rally on a marginal decrease in the core CPI. Core CPI dropped from 3.30% in November to 3.25% December, in other words, a change within a rounding error was sufficient to get a nearly oversold market ripping higher. Higher expectations for core CPI at 3.3% also provided an excuse for markets to celebrate.I faded the move in bonds as nothing about the December CPI print changed the fundamental narrative of sticky inflation and a cautious Fed or even the prospect of soaring U.S. budget deficits. I speculated on weekly SPY put options as a hedge. I fully acknowledge that the stock market has spent a year and a half or more adjusting to every hiccup and bout of angst over the inflation narrative.The chart below demonstrates that the eye must strain hard to see a change in the profile of core CPI. We will have to wait until later this month to see whether the softer than expected core CPI also bends core PCE off its uptrend from its last trough. Sources: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; January 15, 2025.The volatility index (VIX) well represented the stock market’s huge sigh of relief over inflation. The VIX plunged 13.9% and brought an end to the most recent uptrend.

Shelter Inflation Continues Trending Down
Shelter inflation, along with services inflation, has been a key culprit in stubbornly sticky inflation. The National Association of Home Builders (NAHB) pointed out that “the year-over-year change in the shelter index remained below 5% for a fourth straight month and posted its lowest annual gain since January 2022, suggesting a continued moderation in housing inflation.” Shelter inflation has even been on a definitive downtrend since peaking in March, 2023. Unfortunately, the current trajectory may be too slow for comfort in terms of its impact on aggregate core CPI.Shelter inflation dropped from 7.5% in December, 2022 to 6.2% in December, 2023 and now 4.6% last December. If this nearly linear pace continues, shelter inflationwill be around 3.2% next December, right around where core CPI currently sits. Thus, other components will still need to do some heavy-lifting in coming months to meaningfully push core CPI, and presumably core PCE, closer to the Fed’s 2.0% target. Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average [CUSR0000SAH1], retrieved from FRED, Federal Reserve Bank of St. Louis; January 16, 2025
 An Oil BreakoutOil prices are not part of the core CPI, but its recent breakout has caught my attention. A continued, persistent rise in oil prices could bleed into higher inflation expectations for consumers. Such a dynamic may further motivate the Federal Reserve to sit on its hands with monetary policy. A 3.3% gain in the United States Oil Fund (USO) sent the ETF to a 2 1/2 year high.

A Spike In Short-Term Inflation Expectations?
Every month, the New York Federal Reserve publishes a survey of consumer expectations. This survey includes various measures of inflation expectations. The 1-year median expected inflation rate for consumers stayed around 3.0% for all of 2024, consistent with the narrative of sticky inflation. However, a potentially interesting blip happened in December where the median point prediction jumped from 3.0% to 3.8%. The median point predictions are typically higher than the median expected inflation rate, but they rarely diverge and almost never by such a wide margin. The accompanying press release does not refer to this surprising 1-month behavior, but I cannot help speculating on its significance. I will be watching to see whether this point projection manages to lead the median expected inflation rate higher or whether it snaps back to the typical relationship. Either way, such a jump is surely not positive for inflation in the near-term.

The Trade
I continue to maintain a strategy of fading rallies in TLT. Going into the CPI I owned a single February TLT $85 put option “just in case” CPI produced a fresh upside surprise in inflation. Now I can accumulate TLT put options at more attractive prices. TLT’s rally stopped just short of resistance at the 20-day moving average (DMA) (the dotted line below). A breakout from there will set up even more attractive prices on a test of converging resistance between the downtrending 50DMA (the red line) and the bottom of the former trading range (the thick black line). Be careful out there!More By This Author:The Federal Reserve’s “Hawkishness” Finally Gets The Stock Market’s Attention
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