Mid-Day Surge Hits 1000 Points

CPI Print Below Expectations

Reaction to today’s lower than expected CPI print has been extreme!

As I write this, markets are up big (while the VIX, USD and Treasury yields fall):

The Good News

Today’s CPI release came in below expectations (7.7% vs 7.9%) and is what the Fed wants/needs to see to slow down its rate hikes. It’s part of the topping process for yields.

This isn’t a TKO for inflation, but it’s a solid punch to the face. What we really need to see is more lower inflation data prints in coming months for a new vector to appear. But the new trend is quietly emerging, as you can see in the chart below. Hopefully it stays that way.

chart, line chart

The Not So Good News

While the markets are reacting like this is the end of inflation, there’s more to the story. Why is inflation falling? Because discretionary consumption and investment is falling. It is likely that the emerging economic slowdown is starting to affect prices.

Also, 1000 point up days are not a sign of a healthy market. I’m much more comfortable (and confident) when daily market moves are in the <1% range.

Here are some reactions from experts across the capital markets industry:

David Kelly, Chief Global Strategist, JP Morgan AM: “The Fed is determined to see inflation recede, and we’re likely going to need more than one good report to convince them that this is, in fact, happening. However, they may still be willing to watch whether improved inflation trends persist. Because of this, while we still expect the Fed to hike rates by 50 basis points in December, continued evidence of disinflation may allow them to slow the pace further to 25bps in February and then pause. The good news for investors is that the inflation tide is now going out. However, before we rejoice, there’s still a question of whether the Fed allows policy to do its work or pushes the economy into a recession to combat an inflation problem that, based on this report, is receding on its own.“

Sonal Desai, Chief Investment Strategist, Franklin Templeton Investments: “Welcome relief on the inflation print today, with lower than expected headline and core, some deflation in core goods and a deceleration in core services. Monetary policy tightening begins to deliver, and the Fed should feel heartened. But the massive – and immediate – rally we’ve seen today in 10-year USTs (23 basis points at the time of writing) speaks more to the volatility in markets than to the importance of this one data point. Markets are still trying to predict the Fed rather than inflation, and are desperately looking for evidence that the Fed will pivot. I don’t think today’s data change the Fed’s plans and trajectory. Powell indicated in last week’s press conference that we should expect a higher terminal fed funds rate. He would not have said that if he thought one below-consensus inflation print (especially coupled with the continued strength in the labor market as evidenced from Friday’s NFP data) would be enough to sway the FOMC.”

Rich Excell, Clinical Assistant Professor, University of Illinois: “We got confirmation that growth is finally slowing enough that it is pulling inflation lower. We did not get evidence of a soft-landing, which would be risk on. The biggest drags on inflation this month were used car prices and medical care. I spoke about medical care the other day. The drag came from out of pocket expenses which the BLS calculates by looking at insurance company earnings, not by actually determining what is coming out of peoples pockets. Things like shelter were still high. Housing will not be strong come the spring. Affordability is still poor. This means the multiplier from housing will not be there. So, we got confirmation we are actually going into a recession. Yet the mkt celebrates. Of course, much of this is due to positioning.”

Alfonso Peccatiello, The Macro Compass: “While the downward trend in momentum seems solid, a 0.5% MoM trending pace is still way too high to be consistent with a 2% inflation target – I believe the Fed will need more evidence to change their mind, especially as Powell is keen not to let his guard down too early while battling against inflation. We will get another CPI report between now and the December Fed meeting, and while risk assets might understandbly want to chase the trend higher in the meantime we are not yet convincingly out of the woods.”

Rick Rieder, BlackRock’s chief investment officer of global fixed income: “There is something very key here with regard to today’s improvement in used car prices; it confirms what some of the important indicators have been telling us recently: that inflation has begun to moderate from the extreme levels of the past few months.”

Michael Arone, chief investment strategist at State Street Global Advisors: “The trend in inflation is a welcome development, so that’s great news in terms of the report. However, investors are still gullible and they are still impatiently waiting for the Powell pivot, and I’m not sure it’s coming anytime soon. So I think this morning’s enthusiasm is a bit of an overreaction.”

Matthew Luzzetti, chief US economist at Deutsche Bank AG: “I think the underlying elements of this report are actually good, they’re supportive, there’s some evidence that we’re moving from peak inflation down lower. Where do we end up I think is the big question.”

Greg McBride, chief financial analyst at Bankrate: “Any meaningful relief for household budgets is still somewhere over the horizon. In categories that are necessities — shelter, food, and energy — we continue to see large and consistent increases. The areas posting declines are for the most part either irregular or more discretionary in nature — airfare, used cars, and apparel.”

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