Rate cut odds, inflation breakevens/Consumer spending intentions/China

Chris Waller, following Bostic over the weekend, was successful in pulling back the markets from the almost 160 bps of cuts priced in thru December in the fed funds futures market as of last Friday. Now it's about 140 bps which means 100% chance of 5 and a 60% chance of a 6th. That remains though quite different from the 3 that keeps getting talked about from Fed members. Bowman, Barr and Williams speak today but we already heard from Bowman and Williams over the past few weeks so expect nothing new. The odds of a March hike now stand at 62% vs 86% on Friday. 

I have to believe it's related to the spike in shipping costs (we'll get updated pricing tomorrow) that has slowly crept up inflation breakevens in the TIPS market as the 5 yr level yesterday closed at 2.25%, the highest in 2 months, though still well below the one yr peak seen last March at 2.79%. I find that 2.25% average 5 yr inflation as easily exceedable and why we're long short term TIPS. The 10 yr TIPS inflation breakeven is at 2.31%, also a 2 month high. 

Speaking of shipping, the Maersk CEO said this today in Davos of the Red Sea challenges, "So for us this will mean longer transit times and probably disruptions of the supply chain for a few months at least, hopefully shorter, but it could also be longer because it's so unpredictable how this situation is actually developing."

5 yr Inflation Breakeven

10 yr Inflation Breakeven

The NY Fed yesterday released its Household Spending Survey for December (done every four months) and it said "The survey shows a continuation of the recent declining trend in monthly household spending growth, even though spending growth remains well above pre-pandemic levels."

Quantifying this, "The median increase in monthly household spending compared to a year ago declined to 5% in December 2023, from 5.5% in August and 7.1% in December 2022, but remained well above its pre-pandemic level of 2.5% in December 2019."