Two-year Treasuries rallied after Friday’s CPI report ostensibly because there was no inflation ‘surprise’. Crude oil has dropped 16.3% since October 26th. Omicron remains a risk: in the UK, further restrictions to combat the spread of the new variant loom large.
But, given the strength of the labour market, there is currently little reason to expect that the ‘underlying’ rate of inflation (absent pandemic-related price increases in the CPI) is anything less than 2%. Initial claims (seasonally adjusted) slid 43k to 184k in the week ending December 4th, the lowest level for claims since September 6th, 1969.
The 2-year Treasury yield has eased back too much and should jump back up past 0.7% after a hawkish pivot by the FOMC on Wednesday. Three rate hikes are a real possibility in 2022.
The politics cannot be ignored either. The Fed may be independent, but US Democrats are now pushing for a policy shift by the FOMC. This is significant.
Unit labour costs have historically been an excellent lead for the CPI. Unit labour costs (ULC) in the nonfarm business sector jumped at an annualised rate of 9.6% q/q in Q3, revised up from an earlier estimate of 8.3% q/q. The y/y rate accelerated to 6.3% in Q3, the largest annual increase in 39 years.
