Having been ahead of the market anywhere between 4 and 8 weeks as consensus caught up to Goldman’s view on December rate hike odds, which for months were materially higher than what the market implied, Jan Hatzius quietly emerged as one of the very rare Fed whisperers (this year) who has actually gotten what the Fed would do right. Which is why the street will be interested to know that as of moments ago, Hatzius – for the first time – has cut his odds of a December rate hike from 80% to 75%, as a result of today’s CPI miss, and specifically the Shelter Weakness and Surprising Decline in Car Price.
Here is the explanation:
The consumer price index rose 0.5% in September on higher energy prices, but core CPI rose by less than expected, with the year-over-year rate remaining stable at +1.7%. While weakness in auto prices may prove temporary given improving supply/demand dynamics and sharply higher used car auction prices, the slowdown in the more-persistent shelter category is more discouraging for the near-term inflation outlook. The BLS mentioned that Hurricane Irma “had a small impact” on data collection in Florida in this report, but it’s unclear whether this had a meaningful effect on the inflation data. We now estimate that the core PCE price index rose 0.13% month-over-month in September, or 1.32% from a year earlier (vs. +1.29% in August). Retail sales rose in line with expectations in September, reflecting a rebound from recent hurricanes, and the level in prior months was revised up.
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Today’s CPI report was clearly weaker than expectations, and the renewed weakness in shelter categories was particularly discouraging. However, we continue to believe that year-over-year core PCE inflation probably bottomed in August (in part due to easier comparison). Taken together, we lowered our Fed probabilities modestly. We now place 75% odds of a hike in December (vs. 80% previously).
Judging by the market’s prompt reaction, which already saw FF slide to an implied rate of 73% for December, down from 80% before the CPI report, it appears that the market actually rad Hatzius’ mind on this occasion.
