Cool CPI Kick-Starts “Santa Rally”

Stocks erupted this morning, buoyed by an inflation report that came in cooler than anticipated. The Bureau of Labor Statistics released data this morning showing that consumer prices in October remained unchanged from the previous month. This stagnation was primarily due to a decline in oil prices, which significantly tempered headline inflation. Meanwhile, core inflation, which excludes the volatile food and gas prices, rose at its slowest annual pace since September 2021.

The Consumer Price Index (CPI) indicated a halt in price increases over the last month, with a year-over-year rise of 3.2% in October. This marked a slowdown from September’s 0.4% monthly increase and 3.7% annual gain. Contrary to Bloomberg’s forecast, which predicted a 0.1% month-over-month increase and a 3.3% year-over-year rise, the actual figures reflected a more subdued inflationary environment.

Energy costs, which fell by 2.5% month-over-month, played a significant role in keeping the headline figures modest. Gas prices notably decreased by 5% during October. Core inflation, stripped of food and gas costs, climbed 4.0% over the last year, a deceleration from September’s rate. The monthly core prices ascended by 0.2%, also lower than the previous month’s rise.

The shelter index, a critical component of the inflation report, rose by 6.7% on an unadjusted annual basis, marking the slowest increase in a year. This index was a significant contributor to the monthly increase in core inflation, though its growth rate of 0.3% month-over-month was less than September’s 0.6% rise.

Within the core inflation category, rent increases remained high but showed signs of easing. The indexes for rent and owners’ equivalent rent rose by 0.5% and 0.4% monthly, respectively. Other indexes that saw increases in October included motor vehicle insurance, recreation, personal care, and apparel.

Conversely, the indexes for used cars and trucks, new vehicles, airline fares, and household furnishings and operations declined over the month. Notably, used car and truck prices fell by 0.8% in October, continuing a downward trend from September.

The food index rose 3.3% over the last year, with a 0.3% increase from September to October. Apple prices notably dropped by 7.9% month-over-month, the most significant decrease since 1987. Egg prices, however, saw a slight increase of 0.1% month-over-month after a rise of 0.9% in September.

The inflation data significantly influenced the US stock market, with a notable surge in early trading. The 10-year Treasury yield dropped 18 basis points to around 4.45%, while the 30-year Treasury yield declined by approximately 13 basis points to 4.61%.

Despite inflation remaining well above the Federal Reserve’s 2% target, market sentiment is leaning towards the Fed not raising rates in December. This belief is bolstered by Fed Chair Jerome Powell’s comments earlier this month, suggesting a cautious approach to further rate hikes. Following the data release, markets were almost certain that the Federal Reserve would keep rates steady in December, as per CME Group data.

Ellen Zentner, chief economist at Morgan Stanley, noted, “October CPI was soft on the services side, and a November print like this would not meet the bar we previously set for an additional hike in December.” Eugenio Aleman, chief economist at Raymond James, echoed this sentiment, highlighting the report’s positive implications for the Federal Reserve and markets.

However, the battle against inflation is far from over. Michael Pearce, lead US economist at Oxford Economics, cautioned that services inflation could remain persistent, given the tight labor market conditions. He emphasized that while the October CPI report suggests a firm downward trajectory for inflation, the disinflation process is still ongoing, and it will be some time before the Fed considers lowering interest rates.

By midday, the Dow Jones Industrial Average surged over 450 points, or around 1.3%, with the Nasdaq Composite and the S&P 500 also experiencing significant gains. The small-cap Russell 2000 index enjoyed its best day in about a year.

In the corporate sphere, Home Depot reported a smaller-than-expected decline in same-store sales, leading out reports from other major retailers like Target and Walmart. Despite resilient consumer spending, this has not broadly translated into a boost for retail stocks.

Attention also turns to the APEC summit in San Francisco, where a meeting between President Joe Biden and Chinese President Xi Jinping is anticipated. They are expected to announce an agreement on fentanyl manufacture and export control, as reported by Bloomberg. This meeting could signal warming relations between the US and China, a development closely watched by the market.

And so, markets have gone from very overbought to extremely so. But does that mean the rally’s over? Not necessarily. The market made a similar move back in early June of this year when stocks zoomed following an already eye-watering rally.

So, traders will want to buckle up as we head into Thanksgiving, because this ride up probably isn’t over, especially as the market adheres to a strong seasonal trend.


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