There is new inflation news to sift through after a significant week of high-impact economic data releases. Announcements from the U.S. Bureau of Labor & Statistics on the Consumer Price Index (CPI), Producer Price Index (PPI), and the U.S. Census Bureau on Retail Sales caused some major fireworks.
The CPI report released this past Tuesday was unequivocally good. Surprisingly, almost everyone saw it the same way. Headline inflation was 0% MoM. Yes, zero (well, almost, it was 0.04%). Meanwhile, core inflation was up +0.2% MoM, or 2.75% annualized. Both of these were -0.1% below consensus estimates. However, by how the market reacted, you would have thought they were 1.0% below. Markets ripped higher in response to the news, with the S&P 500 up +1.9% and the small-cap Russell 2000 up +5.5% on the day. After a move like that, it is clear the market was concerned with the possibility of inflation remaining elevated and the impact that could have on Fed policy.
There continues to be good news below the headline numbers as well. The “food at home” category was up only +2.1% YoY. This marks the lowest annual increase since Jun 2021 and a staggering decline from August 2022, when the reading was +13.5%. Moreover, the stubborn shelter inflation that has persisted for the last two years appears to be moving decisively lower. While it was up 6.7% YoY, it is in a clear downtrend. In addition, the MoM reading was up only 4.0% annualized, showing continued downward pressure and marking a return to levels last seen pre-COVID. All in all, it was an excellent report.
Continuing in the same spirit, the PPI report also showed easing inflationary conditions. With headline PPI down -0.5 % MoM and core PPI flat MoM, it was more of what the market (and the Fed) were looking for. While declines in gasoline prices drove much of the headline PPI reductions, the core number highlighted continued improvement for producers. And remember, these input prices eventually make their way to the end consumer.
Finally, the retail sales report came in better than expected as well. Even though sales were down -0.1% MoM, the expectation was for a -0.3% decline, which was encouraging. Furthermore, excluding automobiles and gasoline, the number was up 0.1%, even after September numbers were revised higher by 20bps. In the past few months, more robust economic data has, at times, led to market declines, where “good news is bad news.” However, if inflation remains on its current trajectory and the consumer can remain strong enough, that could make the possibility of the economic “soft landing” more likely.
Economy
- Tuesday drove the week, with the S&P 500 up 2.2%, the Nasdaq up 2.4%, and the small-cap Russell 2000 up 5.4%. Inflation news was the driver for the week, as better-than-expected numbers have led many to believe the Fed is done raising rates.
- The annual inflation rate in the U.S. slowed to 3.2% in October from 3.7% in September and August and below market forecasts of 3.3%.
- Annual core CPI in the U.S. edged down to an over two-year low of 4% in October, from 4.1% in the prior month, while markets had expected it to remain steady at 4.1%.
- Producer prices in the U.S. fell -0.5% MoM in October, the most since April 2020, defying market expectations of a 0.1% increase.
- Retail sales in the U.S. decreased by -0.1% MoM in October, ending a six-month streak of increases.
- The number of Americans filing for unemployment benefits rose by 13K to 231K for the week ending November 11, the highest in nearly three months and well above market expectations of 220K.
Stocks
- U.S. equities were in positive territory. Real Estate and Materials were the top performers, while Consumer Staples and Energy lagged. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 19 basis points to 4.44% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
