Stocks gained again today with investors increasingly convinced that the recent slowdown in inflation could lead to a pause in interest rate hikes.
The Dow Jones Industrial Average, Nasdaq Composite, and the benchmark S&P 500 all saw gains exceeding 0.3%. This uptick in stocks was fueled by the unexpected ease in U.S. price pressures, sparking speculation that the Federal Reserve might maintain current rates and possibly initiate cuts as early as next year. This sentiment was reinforced by data released today showing a significant drop in October wholesale prices, the largest monthly decline in over two years.
In addition, U.S. retail sales saw a decrease for the first time in seven months in October, with a notable drop in motor vehicle purchases and spending on hobbies. This decline in demand at the beginning of the fourth quarter further solidified expectations that the Federal Reserve’s rate hiking cycle might be drawing to a close.
Bill Adams, chief economist at Comerica Bank in Dallas, commented on the situation, saying, “The economy is returning to a more normal pace of growth and inflation.” Retail sales dipped slightly by 0.1% last month, according to the Commerce Department’s Census Bureau. This decrease was primarily driven by a 1.1% fall in motor vehicle and parts sales. Furniture store sales also declined by 2.0%, while electronics and appliance outlets saw a 0.6% increase.
The report also showed a 1.7% decrease in sales at miscellaneous retailers and a 0.8% drop in receipts at sporting goods, hobby, musical instrument, and bookstores. Clothing store sales remained steady, while online sales saw a modest 0.2% rise, unaffected by Amazon’s second Prime Day promotion.
Sales at food services and drinking places, a key indicator of household finances, increased by 0.3%. Receipts also rose at health and personal care stores and food and beverage outlets.
Following these reports, U.S. stocks opened higher, continuing the previous session’s robust rally. The dollar gained against a basket of currencies, while U.S. Treasury prices fell.
Financial markets are now predicting an interest rate cut by next May, as indicated by CME Group’s FedWatch Tool. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points, currently sitting in the 5.25%-5.50% range.
The dip in retail sales last month, although partly a correction following a period of strong growth, also suggests that consumers are starting to feel the pinch from higher borrowing costs. Many lower-income families are increasingly relying on credit cards for purchases after depleting excess savings accumulated during the COVID-19 pandemic.
Excluding automobiles, gasoline, building materials, and food services, core retail sales rose 0.2% in October. This figure aligns closely with the consumer spending component of GDP, which surged in the third quarter, significantly contributing to the economy’s 4.9% annualized growth pace.
Another report from the Labor Department’s Bureau of Labor Statistics showed that the producer price index for final demand declined by 0.5% in October, marking the largest decrease since April 2020. Goods prices fell by 1.4%, with a significant 15.3% plunge in gasoline prices. Food prices, however, decreased by 0.2%.
Core PPI, excluding food, energy, and trade services, rose by 0.1% last month and 2.9% year-over-year. Coupled with slumping retail sales, the plunge in inflation may eventually be received as a recession signal rather than an impulse that the Fed is about to cut rates, the latter of which fueled yesterday and today’s gains.