Today we received CPI for October. It was slightly softer than expected and continues to (slowly) trend lower. That’s good news. However, stocks jumped on the data and feel its enough for the Fed to end further hikes. What’s more – the market is now pricing in rate cuts as early as March. That feels like a dangerous (aggressive) assumption… I think there’s a lot more work to do. Remember – getting inflation down from 4% to 2% is where the hard work begins. Wage growth for example remains at 4.2% YoY.
"Inflation"
Sticky Inflation Equals Sticky Rates
If we needed a reminder on how persistent some components of inflation are – we got it this week. Core consumer price inflation (CPI) remained more than double the Fed’s target rate – with rents surging to 0.65% month-on-month. And whilst both headline and core were largely inline with expectations, inflation remains uncomfortably high. As soon as the CPI numbers hit the tape – probabilities of an additional 25 bps hike went up. Markets had not priced that in. What’s more, the probabilities of rate cuts next year dropped. It’s premature to conclude the Fed has hit their terminal rate…
Bye Bye Sugar High
Are equities finally connecting the dots? Maybe. Whilst this has been a difficult market to trade – my sense was to approach with caution. From mine, there were too many open questions. For example, when the market was trading around 4600 – my sentiment was the downside risk outweighed any upside reward. We are now ~8% lower… closer to the zone of where I felt the S&P 500 could trade. In short, valuations were stretched. Put another way, the risk premium for owning stocks wasn’t there. But markets pushed higher – taunting the Fed on their “higher for longer” script.
One Trend That Isn’t Sustainable
More “bad news is good news” hit the tape today… The monthly ADP private jobs number came in far weaker than expected. I say ‘good news’ as it potentially means less Fed (or at least that’s the assumption). Here’s CNBC: “Job creation in the United States slowed more than expected in August, according to ADP, a sign that the surprisingly resilient U.S. economy might be starting to ease under pressure from higher interest rates”
For a full list of posts from 2017…