Inflation data casts doubt on Fed ‘will stay on track’: Morning Brief

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Friday 11 November 2022

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

Stocks and bonds reacted particularly bullishly to new data released Thursday showing that inflation continues to moderate after hitting a 40-year high in the summer.

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

A casual observer might think that the Fed has fueled inflation. While the US is a long way from the 2% inflation target, inflation fell more than expected last month. The total consumer price index rose 0.4% in October from an expectation of a gain of 0.6%, while the annualized reading fell from 7.9% to 7.7%. 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 the Fed has raised interest rates by three-quarters of a percentage point as part of its ongoing efforts to fight inflation following the Federal Open meeting. Market Committee on Interest Rate Policy in Washington, US, Nov. 2, 2022. REUTERS/Elizabeth Frantz

Will this be enough for Fed Chair Jay Powell to change his tone and slow the pace of rate hikes? Echoes of a “Powell pivot” were heard in the Twitter verse as stocks skyrocketed in every sector and industry. While inflation remains stubbornly high, better than feared CPI prints have inspired some investors to take risks again.

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Optimism in 2022 has led to excessive market movements like this one. So far, market participants have misjudged as each major rally has followed new lows in major indices.

Powell, for his part, has promised to raise interest rates, even if it hurts parts of the economy. At his latest press conference, Powell said outright that he is more concerned about “anchored” inflation than the risks of the Fed continuing its aggressive path — the biggest danger is a recession.

That determination hasn’t stopped investors from hoping that the Fed will stop rate hikes sooner or later.

Alfonso “Alf” Peccatiello, founder and CEO of The Macro Compass, told Yahoo Finance on Thursday that bonds are pricing in a lower Fed Funds final interest rate — or the speed at which the Fed stops walking. He also stressed that bond volatility is “falling like a stone” and credit spreads have narrowed. These are all signals that encourage investors to take more risk, at least in the short term.

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“With this inflationary pressure,” Peccatiello said, “investors are less and less confident that the Fed will stay on track.”

What to watch today

Economy

  • 10:00 a.m. ET: University of Michigan Consumer SentimentPreliminary November (59.5 expected, 59.9 during the previous month)

  • 10:00 a.m. ET: U. or Mich. Current conditionsNovember Preliminary (62.8 expected, 65.6 during the previous month)

  • 10:00 a.m. ET: U. of Michigan. ExpectationsNovember Preliminary (55.5 expected, 56.2 during the previous month)

  • 10:00 a.m. ET: U. or Mich. 1 year inflationNovember Preliminary (5.1% expected, 5.0% during the previous month)

  • 10:00 a.m. ET: U. or Mich. 5-10 years inflationNovember Preliminary (2.9% expected, 2.9% during previous month)

Income

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