Inflation eased by more than forecast last month, fueling hope that the Federal Reserve could restrain the pace of interest rate hikes that are slowing the economy and weighing on stocks.
The October consumer price index (opens in new tab) (CPI) rose 0.4% from the previous month, the Labor Department said Thursday, which was below economists’ expectations for an increase of 0.6%. Year-over-year, inflation rose 7.7% in October, but that was also below projections for a gain of 7.9%. Kiplinger is forecasting inflation to continue to cool even more, reaching a rate of a little above 3% by the end of next year.
Core CPI, which strips out volatile food and energy prices and is thought to be a better predictor of future inflation, rose 0.3% in October vs. September. Economists projected core inflation to rise 0.5%.
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U.S. equity markets celebrated the good inflation news by having their best session since 2020. The blue-chip Dow Jones Industrial Average added more than 1,200 points, or 3.7%, Thursday, while the broader S&P 500 made an ever greater leap, rising more than 5.4%. The breakout benchmark star, however, was the Nasdaq Composite, which is particularly sensitive to higher interest rates. The tech-heavy index soared more than 7.3% to finish at 11,114.
With the October CPI numbers now on the books, we decided to see what the experts had to say about the inflation report. Below please find a selection of commentary from economists, strategists, investment officers and other market pros, sometimes edited for brevity:
“The stiff backbone of U.S. inflation finally cracked in October, though one month doesn’t make a trend. The CPI rose a relatively light 0.4%. The moderation was despite a 4% pop in gasoline, with some offset from lower natural gas prices and less bloated food costs. Used auto prices fell for a fourth straight month, medical care services costs reversed lower (after insurance premiums went on a tear of late), and clothing prices extended a recent downward trend, as did airfares. Countering these declines were rising auto insurance premiums and new vehicle prices. The main item still pressuring the core measure is shelter. Goods prices are weakening as consumers push back against price hikes, while service costs (notably shelter) remain brisk though they no longer appear to be accelerating. That’s a small win for the Fed.” – Sal Guatieri, senior economist at BMO Capital Markets”Great CPI number. The breadth of the price weakness was remarkable and the lags from sharply higher interest rates and the soaring U.S. dollar are only now percolating through the system. Treasuries are rallying hard and for good reason. As for equities, the instant reaction will fade as the reality of diminished corporate pricing power and earnings downgrades come to the fore — the major theme for 2023. What does the Fed think about this number? Who knows? Powell already put everyone on notice that he needs to see a multi-month string of numbers just like this before shifting policy. So, they likely go 25 basis points [0.25%] – maybe 50 basis points [0.50%] – at the December meeting, but that is likely to be it for the cycle.” – David Rosenberg, founder and president of Rosenberg Research”The Fed is still on track to increase the fed funds rate by 0.50% on December 14. Most importantly, the Fed will release updated projections which will likely include upward revisions to both next year’s inflation rate as well as the peak fed funds rate. However in the near term, investors should respond favorably to these encouraging moves in consumer prices.” – Jeffrey Roach, chief economist at LPL Financial”Markets are applauding the cooler inflation print and expectations for a downdraft in rates has begun with expectations for the December 14th rate hike anchored at 50 basis points. Still, markets need to absorb Friday’s University of Michigan’s Consumer Sentiment Survey that includes consumer 5- to 10-year consumer inflation expectations, which has climbed to an uncomfortable 2.9%. For the Fed – and markets – to be convinced that inflationary pressures are easing at an acceptable and durable pace, consumer expectations need to ease as well.” – Quincy Krosby, chief global strategist at LPL Financial”This morning’s data showed further weakness in goods prices across all categories such as apparel, transportation and education. The pandemic pulled forward purchases of many discretionary items, and now the reduced demand in the wake of the pandemic has contributed to rising inventories and disinflation. As we enter the holiday season, retailers may capitalize on seasonal demand to shrink inventories. Several large retailers have already announced early holiday shopping deals. Last week at the FOMC meeting, the Federal Reserve highlighted that it was very premature to talk about a ‘pause,’ signaling that they will continue to raise rates in their next meeting in December. The only question is by how much. This report indicates that they can decelerate their pace of hiking to a [0.50%] pace in their December meeting given the emergence of some evidence that certain components of inflation are slowing down.” – BlackRock’s Gargi Chaudhuri, head of iShares Investment Strategy, Americas “Like an athlete running in a marathon, the Federal Reserve’s attempt to bring inflation down toward its 2% target requires some patience, but importantly, moving forward matters even if it’s early on in the race. Today’s CPI report showed some moderate improvement as some of the previously elevated excessively high inflation-drivers, such as used cars, started to decline at a faster pace. There is something very key here with regard to today’s improvement in used car prices; it confirms what some of the important indicators have been telling us recently: that inflation has begun to moderate from the extreme levels of the past few months. Today’s report gives some hope to investors, and importantly, in the near-term to the Fed.” – Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income and head of the BlackRock Global Allocation Investment Team”The equity markets are reacting optimistically to the easing of headline inflation. We believe this is yet another triumph of hope over reality. Sustained price pressures in housing, wages and energy indicate a prolonged battle against inflation. Indeed, Fed Chair Jerome Powell last week was unambiguous in his comments that rates would remain higher for longer. Though bear market rallies are fueled with optimism, we remain mindful of technical resistance overhead, a relatively calm VIX, dollar strength, high yield spreads, and 2023 EPS estimates that remain too high. Consequently, investors should view any gains on today’s CPI news as suspect.” – John Lynch, chief investment officer at Comerica Wealth Management”Finally, some good news for the economic outlook! If inflation continues to moderate in the November CPI report, which will come out right before the Fed’s last decision of the year, it will probably be enough for the central bank to switch from 0.75 percentage point rate hikes to a smaller 0.50 percentage point hike. There is good news on prices in other data. The economy seems likely to weaken further through the turn of the year. But with some light shining at the end of the tunnel for inflation, financial markets are pricing in the fed funds rate peaking at under 5% in the first half of 2023, down from a peak over 5% anticipated yesterday. If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller.” – Bill Adams, chief economist at Comerica Bank”As the high frequency inflation indicators have shown for months, inflation, at long last, is declining in earnest in the official CPI numbers.” – Jamie Cox, managing partner at Harris Financial Group”Today’s inflation data is a reflection of the ‘cumulative’ work that has already been done by the Fed with front loading of rate hikes over the past eight months. Chairman Powell and committee have to be enthused with a lower CPI print for October as it validates the prescribed policy decisions in place. While it is important that this is only one data point in a series of economic measures before the December meeting, the data today kicks the door open for the Fed to begin reducing the pace of rate hikes. Overall, the CPI data is good news across the board, but we still have a ways to go before inflation comes down to an acceptable level.” – Charlie Ripley, senior investment strategist at Allianz Investment Management”Good News (for the economy) is Good News (for markets) again. In a welcome development, the inflation data this morning was lower than expected across the board, and this should allow the Federal Reserve to downshift from 75 basis point rate hikes to 50 basis point rate hikes, and soon to the more traditional 25 basis point rate hikes. The inflation problem isn’t completely solved, but as the rate of change begins slowing down, it allows people to take some of the worst-case scenarios off the table. We will be confronting a recession next year, unemployment is likely to rise and corporate profits will fall, so it’s too soon to call the all clear for this cycle, but it is a welcome reprieve for markets which have been like a beach ball held under water.” – Chris Zaccarelli, chief investment officer at Independent Advisor Alliance”Investors got a really nice beat on CPI this morning driven by goods ‘deflation’ and medical costs; markets are reacting strongly in kind. There’s no question this release is a welcome sight at the Fed, which now has room to step down the pace of hikes to 50 basis points in December and potentially less in 1Q. Any talk of a pivot is still premature. The Fed will need to see further evidence in coming months that inflation will continue slowing back toward target. While this morning’s release is a great start, there is still a lot of heavy lifting to do. We’ve seen 0.3% readings earlier this year, and one data point does not make a trend. Investors and the Fed will need to see a string of positive developments on inflation before the all-clear sign for risk assets can take hold.” – Cliff Hodge, chief investment officer at Cornerstone Wealth “Encouraging report for the Fed but doesn’t mean we see a change of plans/ action from the Fed. The Fed wants to see a series of month-on-month core numbers that annualize to something in the direction of 2%. We do know year-over-year comparisons get easier for a deceleration. We think wage inflation is still a big problem and I think there is energy inflation coming back (absent a Russia-Ukraine deal) following the end of Strategic Petroleum Reserve releases after the elections. We will get a number of Fed speakers today and the rest of the week. We will closely watch to see if they continue with the hawkish message or not. But 50 basis points in December is now the base case.” – John Luke Tyner, portfolio manager and fixed income analyst at Aptus Capital Advisors “Today’s CPI report is great news for the Federal Reserve, but as we normally say, one good data point doesn’t a trend make. So, we will need to continue to monitor if this trend continues going forward. However, the Fed will continue to push interest rates higher in the next several months as shelter and transportation services prices are still growing too fast, and the prospects for higher energy prices could worsen the inflation picture during the last months of the year.” – Eugenio Alemán, chief economist at Raymond James”Thursday’s softer-than-expected inflation number confirms our belief that inflation is yesterday’s story. Inflation is still way above the Fed’s 2% target and we believe the Fed will keep their word and continue to raise interest rates. We are preparing for an environment where interest rates remain higher for longer. Investors should be more concerned with the effect that rising rates into a decelerating economy has on their portfolio values rather than the current level of inflation. Our message to investors is that a recession is in front of us and inflation is behind us. Investors should take steps to ensure that their portfolio is positioned for a global recession, as the stock market still isn’t pricing in this global recession risk. We are bullish on areas of the market that are poised to perform well during a global recession, such as the healthcare and staples sectors. The U.S. Dollar continues to be our largest long position. We are bearish on the sectors that we think will do poorly in a global recession such as tech and discretionary.” – Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management”Today’s news on inflation is certainly welcome, and it reduces the likelihood of another 75 basis point rate hike at the December 14 FOMC meeting. That said, the core CPI rose at an annualized rate of 5.8% between July and October, which is still much too high for the Committee’s liking. It likely will be a number of months yet until the FOMC feels confident that inflation is indeed receding back toward its target of 2%. In short, we expect that the Fed policymakers will remain biased toward over-tightening rather than under-tightening for the foreseeable future.” – Sarah House, senior economist at Wells Fargo