Inflation data raises doubts about whether Fed will ‘stay the course’: Morning Brief

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Friday 11 November 2022

Today’s newsletter is through Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared. Read this and more market news on the go with Yahoo Finance App.

Stocks and bonds had a particularly bullish reaction to new data released on Thursday showing inflation continuing to moderate after hitting a 40-year high over the summer.

The Dow (^DJI), Nasdaq (^IXIC), S&P 500 (^GSPC) and Russell 2000 (^RUT) each had their best day since the 2020 pandemic lows. The 5- and 10-year Treasury notes (^FVX, ^TNX) saw their biggest one-day drop in yields since then-Fed Chairman Ben Bernanke increased quantitative easing back in March 2009.

A casual observer could be forgiven for thinking the Fed was driving up inflation. While the US is far from its 2% inflation target, inflation eased more than expected last month. The core consumer price index rose 0.4% in October against expectations of a 0.6% increase, while the year-on-year reading eased to 7.7% from 7.9%. Excluding food and energy, core inflation also rose in October, but less than expected.

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Federal Reserve Chairman Jerome Powell holds a news conference after Powell announced that the Fed has raised interest rates by three-quarters of a percentage point as part of their ongoing efforts to combat inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington.  USA, November 2, 2022. REUTERS/Elizabeth Frantz

Federal Reserve Chairman Jerome Powell holds a news conference after Powell announced that the Fed has raised interest rates by three-quarters of a percentage point as part of their ongoing efforts to combat inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington. USA, November 2, 2022. REUTERS/Elizabeth Frantz

Will that be enough for Fed Chairman Jay Powell to change his tune and slow the pace of rate hikes? Echoes of a “Powell pivot” could be heard across the Twitter-verse as stocks in every sector and industry soared higher. Although inflation remains stubbornly high, the better-than-feared CPI prints have inspired some investors to start taking risks again.

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Optimism throughout 2022 fueled excessive market moves like this. So far, market participants have misjudged, as new lows in the major indexes have followed every major rally.

Powell, in turn, has promised to raise interest rates even if it hurts parts of the economy. At his last press conference, Powell flatly said he was more worried about “entrenched” inflation than he was about the risks of the Fed continuing on its hawkish path – the biggest danger being a recession.

That decision did not stop investors from hoping that the Fed would stop interest rate hikes sooner rather than later.

Alfonso “Alf” Peccatiello, founder and CEO of The Macro Compass, told Yahoo Finance on Thursday that bonds are pricing in a lower terminal Fed Funds rate – or the rate at which the Fed stops hiking. He also emphasized that the volatility of bonds is “dropping like a stone” and credit spreads have tightened. These signs all prompt investors to take more risk, at least in the short term.

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“With these inflationary pressures,” Peccatiello said, “investors believe less and less the Fed will stay the course.”

What to watch today

Economy

  • 10 a.m. ET: University of Michigan Consumer SentimentPreliminary November (59.5 expected, 59.9 during previous month)

  • 10 a.m. ET: U. of Mich. Present ConditionsPreliminary November (62.8 expected, 65.6 during previous month)

  • 10 a.m. ET: U. of Mich. ExpectationsPreliminary November (55.5 expected, 56.2 during previous month)

  • 10 a.m. ET: U. of Mich. 1 Year InflationPreliminary November (5.1% expected, 5.0% during previous month)

  • 10 a.m. ET: U. of Mich. 5-10 years InflationPreliminary November (2.9% expected, 2.9% during previous month)

Earnings

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