There was a modest bid in the equity futures market ahead of the release of the October Consumer Price Index (CPI) at 8:30 a.m. ET. There was also a bid in the Treasury market that drove the 2-yr note yield down four basis points to 4.60% and the 10-yr note yield down seven basis points to 4.08%. The U.S. Dollar Index was up 0.2% to 110.77.
These were credible indications, only there was no point trusting them knowing that everything was subject to material change after the release of the CPI data.
Sure enough, there was a material change in everything following a CPI report that was better than expected and certainly much better than feared.
Total CPI increased 0.4% month-over-month in October (Briefing.com consensus 0.7%) while core-CPI, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus 0.5%).
The monthly changes left total CPI up 7.7% year-over-year, versus 8.2% in September, and core CPI up 6.3% year-over-year, versus 6.6% in September.
The key takeaway from the report isn’t singular. It is manifold: (1) The report helps validate the peak inflation view. (2) The report is apt to compel the Fed to take a less aggressive rate-hike approach at the December FOMC meeting. (3) Some encouragement will be borne out of the understanding that the shelter index (computed with a lag) contributed more than half of the monthly all items increase, suggesting price increases moderated in many other areas.
The reaction in the market says it all about how market participants feel about this report.
Currently, the S&P 500 futures are up 120 points and are trading 3.2% above fair value, the Nasdaq 100 futures are up 475 points and are trading 4.4% above fair value, and the Dow Jones Industrial Average futures are up 771 points and are trading 2.3% above fair value.
The 2-yr note yield is down 26 basis points at 4.37% and the 10-yr note yield is down 23 basis points at 3.92%. The U.S. Dollar Index is down 1.3% at 109.07.
Said another way: market participants are loving this inflation report and the implication that it will encourage the Fed to take a softer approach.
The point remains, however, that the Fed will still raise the target range for the fed funds rate further. A 7.7% inflation rate is still far too high and has “a ways to go” to get to the Fed’s 2.0% inflation target. Be that as it may, the direction in trend at this point is more important than the level itself.
There is undoubtedly some short-covering activity that is helping to drive prices higher.
The weekly initial jobless claims report has been more of an afterthought for a market that was fixed on the CPI report.
Initial jobless claims for the week ending November 5 increased by 7,000 to 225,000 (Briefing.com consensus 220,000) while continuing jobless claims for the week ending October 29 increased by 6,000 to 1.493 million.
The key takeaway from the report is that initial jobless claims are still running at low levels, yet the latest reading shows claims moving in a direction that has been deemed the right direction for tempering the pace of the Fed’s rate hikes.
Altogether it promises to be a big open for stocks. That is a given, but this open needs to be about a sustainability effort. Can the market sustain its gains and maintain a positive bias in the coming days and weeks?
That remains to be seen, but for now, the market is seeing some inflation light — and rate-hike light — at the end of the tunnel.
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Originally Posted November 10, 2022 – Seeing inflation light at the end of the tunnel
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