Markets fall after December inflation is hotter than expected

Dow dropped 252, decliners over advancers about 3-1 & NAZ declined 136.  The MLP index added 2+ to the 256s & the REIT index fell 4 to the 388s.  Junk bond funds were mixed & Treasuries fluctuated (more below).  Oil rose 2+ to the 73s & gold added 6 to 2034.

AMJ (Alerian MLP Index tracking fund)

Inflation rose more than expected in Dec thanks to a jump in energy & housing costs, underscoring the challenge of taming price pressures within the economy.  The Labor Dept said that the consumer price index, a broad measure of the price of everyday goods including gasoline, groceries & rent, rose 0.3% in Dec from the previous month, more than expected.  Prices climbed 3.4% from the same time last year, coming in above both the expectation & the 3.1% gain recorded in Nov.  Other parts of the report indicated that inflation is continuing to retreat, albeit slowly.  Core prices, which exclude the more volatile measurements of food & energy, climbed 0.3% (3.9% annually).  Both of those figures are slightly higher than estimates; however, it marked the first time since May 2021 that core inflation fell below 4%.  Altogether, the report indicates that while inflation has fallen considerably from a peak of 9.1%, it remains above the Federal Reserve's 2% target.  High inflation has created severe financial pressures for most US households, which are forced to pay more for everyday necessities like food & rent.  The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily affected by price fluctuations.  Housing costs were the biggest driver of inflation last month.  Rent costs rose 0.4% for the month & are up 6.2% from the same time last year.  Rising rents are concerning because higher housing costs most directly & acutely affect household budgets.  Other price gains also proved persistent in Dec.  Food prices, a visceral reminder of inflation for many Americans, rose 0.2% over the course of the month, & grocery costs rose 0.1% last month & are up 1.3% compared with the same time last year.  Energy costs, meanwhile, climbed 0.4% in Dec, including a 0.2% increase in gasoline prices & a 1.3% spike in electricity.

Inflation jumps higher than expected in December

US shipping costs are spiking as attacks in the Red Sea disrupt global trade, raising fears that inflation might pick up again if the disruption persists.  The diversion of container ships from the Suez Canal around the Cape of Good Hope in South Africa is having a “global contagion” effect on freight rates, according to a S&P Global report published this week.  Trade between Asia & Europe has faced the largest impact with the Suez Canal serving as a crucial gateway between the 2 regions.  The rate for a 40-foot container from North Asia to Europe has surged more than 600% to $6000 since the outbreak of the Israel-Hamas war in Oct, according to S&P Global Commodity Insights.  But the Red Sea crisis is now having a significant impact further afield with shipping costs between Asia & the US also spiking.  Shipping rates from North Asia to the US East Coast have jumped 137% to $5100 for a 40-foot container from early Oct, according to S&P Global. Rates from North Asia to the US. West Coast have jumped 131% to $3700 during the same period.  National Security Council spokesperson John Kirby told said last week the economic impact of Red Sea disruptions depends on how long the threat goes on.  “But make no mistake, it is a key international waterway, and it can have an effect on the global economy,” Kirby said.  The Biden administration is concerned, Kirby added, pointing to the multinational maritime force the US is leading to protect vessels.  Some ocean carriers had originally rerouted trade from Asia to the East Coast away from the Panama Canal & thru the Suez as an alternative.  The attacks on vessels in the Red Sea are now forcing shippers such as Hapag-Lloyd to reroute Asia-East Coast trade around the Cape of Good Hope in Africa, according to S&P Global.  Ocean carriers could rely on transpacific routes to the West Coast as an alternative to the canals, but this raises potential congestion problems at ports

Red Sea crisis could jeopardize inflation fight as shipping costs spike globally

The 10-year Treasury yield rose above 4.06% after the latest inflation reading came in hotter than expected, pushing expectations for an interest rate cut from the Federal Reserve further out.  The yield on the 10-year Treasury note rose more than 3 basis points at 4.062% & it has been hovering around the 4% mark for much of the week.  The 2-year Treasury  yield was last more than one basis point higher at 4.383%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  The Federal Reserve in Dec said it was expecting to cut rates in small increments 3 times this year.  But minutes from the meeting showed that significant uncertainty remains about the direction of interest rates & that some policymakers have also not excluded the possibility of rates going higher still.  Many investors are hoping that rates will be cut more than the Fed itself is anticipating & that cuts will begin as soon as Mar.  Markets were last pricing in an around 61% chance of the first rate cut taking place then, according to the CME FedWatch Tool.  The CPI data will be followed tomorrow by Dec's producer price index, which tracks inflation on a wholesale level.

10-year Treasury yield rises above 4.06% after higher-than-expected December CPI

The inflation data is above what was anticipated & suggests it is less clear what the path for future rate cuts are.  Increased shipping costs from Asian countries should be expected to make it harder to control inflation from present levels.

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