Risk assets surge on friendly CPI inflation print
Risk assets surge on friendly CPI inflation print
The Sandbox Daily (11.10.2022)
Welcome, Sandbox friends.
Today’s Daily discusses the talk of the tape -> the Consumer Price Index (CPI) report from October. Everything else took a back seat to today’s crazy upside price action.
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +7.49% | Russell 2000 +6.11% | S&P 500 +5.54% | Dow +3.70%
FIXED INCOME: Barclays Agg Bond +2.15% | High Yield +3.11% | 2yr UST 4.331% | 10yr UST 3.811%
COMMODITIES: Brent Crude +0.73% to $93.33/barrel. Gold +2.64% to $1,759.0/oz.
BITCOIN: +12.06% to $17,726
US DOLLAR INDEX: -2.36% to 107.945
CBOE EQUITY PUT/CALL RATIO: 0.96
VIX: -9.81% to 23.53
CPI inflation cooling
After many months of inflation coming in above expectations, investors finally got a more favorable report with the October Consumer Price Index (CPI) data, sending risk assets skyrocketing.
The Consumer Price Index (CPI) increased +0.4% MoM in October – the same as in the prior month – and below the consensus of +0.6%. Core CPI, which excludes the more volatile food and energy components, rose +0.3% MoM, the least since September 2021, and also below the consensus of +0.5%.
On a YoY basis, the headline CPI print eased to +7.7% from +8.2% in the prior month; this is the lowest level since January and off the peak rate of +9.1% back in June. Core CPI inflation came down to +6.3% from a cycle peak of +6.6% in the prior month.
Both the headline and core inflation rates continue to run much higher than pre-pandemic times, but are showing noteworthy signs of cooling.
Source: Ned Davis Research, Bloomberg
Diving into the details
Some categories are still showing persistent and extreme behavior (oil, food, transportation), while others show continued easing (natural gas, used cars, medical care services).
Here is the data broken out by detailed expenditure category at a more granular level to highlight some of the extremes.
We can see the overall trend (current month October in blue) is moderating for most categories, as compared to the prior three months.
Source: U.S. Bureau of Labor Statistics, Charles Schwab, Charlie Bilello
Shelter category is most concerning
The +0.8% rise in the shelter component of CPI is the largest MoM increase since August 1990. This is painful for the average American and continues to speak to the housing affordability crisis gripping so many people. The Shelter category accounts for 32.5% of headline inflation. In fact, if we were to exclude shelter, then core CPI was actually down -0.1%.
Keep in mind that while home price growth has already started to moderate, there is a significant lag of 12 to 18 months before that is reflected in a meaningful way in the CPI. As a result, shelter will continue to be a source of higher inflation into 2023.
Source: U.S. Bureau of Labor Statistics, Liz Ann Sonders
The Fed’s difficult proposition
Such broad-based inflation pressures continue to reflect supply/demand imbalances. Consumer demand remains strong – supported by low unemployment, excess savings accumulated during the pandemic, and the ongoing post-pandemic shift back toward more services consumption versus goods. At the same time, while some supply chain problems have eased, others such as labor shortages have endured. This underscores the difficult task for the Fed to bring inflation down without causing a recession – the desired “soft landing.”
The Federal Reserve’s upcoming policy meeting is December 13-14. With this singular data point, Fed rate hike expectations turned decidedly dovish following today’s CPI report. If the Fed is looking for clear and convincing evidence that inflation has peaked, today’s CPI report is a good first step, putting the downshift in rate hikes in sight.
The market is now pricing a 0.50% rate hike at the next meeting, after raising interest rates by 0.75% at four consecutive meetings and an a cumulative 3.75% across six meetings in 2022. This would take the fed funds target range to 4.25%-4.50%.
Source: CME FedWatch Tool
Stocks rally on today’s inflation narrative
The S&P 500 gained +5.54% today, its largest percentage increase since April 2020 and 15th largest since 1950. One year later the market has often been higher following these large daily spikes (22 out of 24 times) with an average return of +31%. The two exceptions: September 2008 & January 2001.
Today was a great day to be long stocks.
Source: Charlie Bilello, StockMarketNews
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.