Good Tuesday AM,

What is happening?

Consumer prices rose last month at the slowest 12-month pace since December 2021, closing out a year in which inflation hit the highest level in four decades and challenged the Federal Reserve’s ability to keep the U.S. economy on track. The Labor Department on Tuesday said that its consumer-price index climbed 7.1% in November from a year ago, down sharply from 7.7% in October—building on a trend of moderating price increases since June’s 9.1% peak. Core CPI, which excludes volatile energy and food prices, rose 6% in November from a year ago, easing from a 6.3% gain in October. September’s 6.6% increase was the biggest jump since August 1982.

Prices softened significantly on a month-to-month basis.

The CPI increased 0.1% in November from the prior month, compared with 0.4% in October. Core CPI rose 0.2% in November, down from 0.3% in October and 0.6% in August and September. CPI measures what consumers pay for goods and services. So great news, right? Assets were off to the races at 5:30 am when the news hit.. Bonds were en fuego. The 10yr down to 3.43%, mortgage bonds up 75 basis points, the Dow +700.

Then the haze lifted, and all the gains evaporated… All.

But why? Profit taking on the market anxiety around what the FED will say tomorrow. But until then, markets are going to be in a holding pattern. I will say that today was the set-up day. Tomorrow is important, but the Fed will have to acknowledge the reduction in inflation so it’s less of an unknown. Markets will be watching for any tip off on the terminal rate. I will be surprised if we do not hear a far more dovish Fed tomorrow which should turbo-charge our rally. With the announcement not until 11am, I think it is ok (as of now) to float into the meeting (not a typical position of mine).

Please remain safe and stay healthy, make today great!