An unexpected slowdown in inflation supported bets that the Federal Reserve’s aggressive cycle of rate hikes is now complete and that a rate cut will occur next year, as stock prices rise and bond yields fall. The S&P 500 rose nearly 2%, the most since April. Tesla Inc. led gains in megacaps and Nvidia Corp. rallied for a 10th straight session. Regional banks jumped almost 6%. The Russell 2000 index of small caps added over 5%.
October’s headline Consumer Price Index (CPI) provided the best month-over-month (m/m) reading since July 2022 from a disinflationary perspective. Last month’s 0% result was better than expectations of 0.1% while reflecting an improvement from September’s 0.4% increase.
Progress was also evident from a year-over-year (y/y) angle, with consumer prices rising only 3.2%, better than the 3.3% projection and September’s 3.7%. Core inflation, which excludes food and energy and is considered a better gauge of the medium- to longer-term trajectory of price pressures, also rose below economists’ estimates. The core CPI rose 0.2% m/m and 4% y/y, relative to anticipations of 0.3% and 4.1%. Compared to September, core slowed from that month’s 0.3% and 4.1% figures.
The questions remained unanswered as of now:
Will the US Fed refrain from hiking rates further in this tightening campaign that started in 2022?
Will the Fed take a long pause before starting to cut rates?
How much rate cut is in the offing in 2024?
Will inflation make a comeback?
Here are some market voices on the road ahead for markets and the central bank.
Nigel Green, CEO, deVere Group
US inflation (CPI) comes in cooler than expected but investors still need to adjust to a ‘higher-for-longer’ interest rate environment. The surprisingly cool CPI solidifies our expectations that the Federal Reserve is done with hiking rates this year and will hold them steady in December.
However, we believe there will be a sustained period of slower progress than we’ve seen up to this point against inflation in the flight to get it back to the 2% target. The process is going to be more gradual moving forward. Therefore, we expect one more hike from the Fed next year to boost that progress a little.
US CPI readings support his anticipation of a year-end market rally in 2023. We’re about to see a year-end rally, which investors would not want to miss out on as markets turn bullish on the Fed likely holding rates steady.
José Torres, Senior Economist at Interactive Brokers
Market players have shifted their focus from reaping the benefits of a Fed pause to hoping for Fed cuts at a brisk pace. The result is an outright market bonanza, with stocks looking to add to their 16% year-to-date gain as we close out the year.
But is the loosening of financial conditions amidst bullish sentiment in markets an inflationary development? We’ve seen renewed hawkish commentary from the Fed several times this tightening cycle following a cool inflation report that boosts animal spirits.
At this juncture, markets are exuberant and likely ahead of themselves as Treasury issuance and a lurking Fed remain headwinds.
Jeffrey Roach, Chief Economist for LPL Financial
The annual rate of core inflation decelerated to 4%, the smallest rate since mid-2021 and should likely keep the Fed from raising interest rates at next month’s meeting. Despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to the long-run 2% target.
Quincy Krosby, Chief Global Strategist for LPL Financial
The CPI report has been welcomed by the equity and Treasury markets alike, but the so-called “last mile” in the Fed’s campaign to quell inflation still remains sticky. With 29 days remaining until the next FOMC meeting, the data-dependent Fed will have a heavy slate of inflation-related data to absorb.
Consumer expectations for inflation over a one-year and three-five-year period need to adjust downward, for the Fed to feel comfortable in declaring victory.
The widely followed University of Michigan’s consumer sentiment report suggests consumers, particularly lower wage earners and younger workers, see inflation climbing considerably higher in the future. Their expectations need to be firmly anchored before the Fed can be assured that their job is completed successfully.
Bill Adams, Chief Economist for Comerica Bank
The inflation fever has broken in the United States. Rising petroleum production is holding down gas prices, house prices are rising more slowly after mortgage rates surged in 2023, and rents are also rising more gradually as a big increase in new multifamily supply starts to reach the market.
New and used car prices are helping bring down inflation, too, after being a big driver of it in 2021 and 2022. High car loan rates are restraining demand while carmakers are competing more aggressively as they roll out many new vehicle models, with the competition most intense in the EV space.
You can still see the momentum built up in inflation flowing through the CPI basket. For example, motor vehicle insurance jumped 1.9% on the month, reflecting the lagged effects of big increases in car prices and repair costs in the last few years. But disinflationary forces are pushing in the other direction harder now.
October’s cooler-than-expected CPI report keeps the Fed on course for rate cuts in 2024. Comerica forecasts for the next change in monetary policy to be a quarter percentage point fed funds rate cut in June.
Jamie Cox, Managing Partner for Harris Financial Group
The CPI data confirm what everyone already knew—inflation is on the decline in a meaningful way. The question now for the Fed is whether they continue to believe that slowing the economy into recession is needed to completely conquer inflation. I certainly hope not.
Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth
CPI came in this morning slightly below expectations sending bond yields plummeting and equity futures soaring. It will be important to watch how markets react to this news throughout the day given the fact that while CPI did come in below expectations it is still quite high from a historical perspective and what the potential implications from our Overlords at the Fed may mean.
Gina Bolvin, President of Bolvin Wealth Management Group
We need to see more months with soft inflation data, but the stock and bond market is celebrating today. We’re set up nicely for a year-end rally.
Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance
The Consumer Price Index (CPI) data dropped significantly, from 3.7% to 3.2% year-over-year, and it was even lower than expected (e.g. less than 3.3%), which should embolden those Fed watchers that believe they are done raising rates for this year and potentially for the entire rate tightening cycle.
Whether or not the economy can stay out of recession remains to be seen, but the stock market should continue to rally as people begin to accept that higher rates are off the table, which should push stock and bond prices higher (and bond yields lower).
Unemployment remains low, consumers continue to spend, and companies are earning record profits, so until a recession begins – which can take much longer than anyone previously believed – there is every reason to believe we will see the risk-on rally continue.
Charlie Ripley, Senior Investment Strategist for Allianz Investment
Overall, service sector inflation was not as strong as anticipated, despite the 1.1% increase in health insurance, and the prescribed policy from the Fed continues to show progress in bringing down inflation. At this juncture, it is hard to envision the Fed will need to administer another rate hike at the December meeting and the market is clearly reflecting that.
Sam Millette, Director of Fixed Income for Commonwealth Financial Network
The October Consumer Price Index (CPI) report showed slowing inflationary pressure during the month. This marks the lowest level of core consumer inflation since September 2021.
Markets reacted positively to the update, with equity futures rising and short-term bond yields falling post-release. The rally was due to rising investor belief that the Federal Reserve will now be less likely to hike interest rates at future meetings. Futures markets are not currently pricing in a rate hike at the next FOMC meeting in mid-December, and this result supports a wait-and-see approach at the upcoming meeting.