“It doesn’t matter if you win by an inch or a mile, winning is winning.”– Vin Diesel as Dominic Toretto in The Fast and the Furious (2001). 🍿
That quote pretty much sums up today’s highly-anticipated Consumer Price Index (CPI) report.
Let’s get into why…
First off, let’s recap what happened after September’s CPI report was released last month. Inflation came in hotter than expected, with core inflation seeing its largest YoY gain since August 1982. That reinforced the market’s view that the Federal Reserve would raise rates by 75 bps in November, which they did. Funnily enough, sellers were also squeezed, as positioning into last month’s CPI report was decidedly negative.
Today’s report painted a different but eerily similar picture. 🖼️
Headline CPI rose 0.4% MoM and 7.7% YoY, vs. the 0.6% and 7.9% expected. And core CPI, which excludes food and energy costs, rose 0.3% MoM and 6.3% YoY, vs. the 0.5% and 6.5% expected.
On the surface, this seems like awesome news. Inflation is coming down, right? Well, yes and no.
Inflation is starting to come down but remains way above what the Federal Reserve deems acceptable. That means monetary policy isn’t likely to change anytime soon, and rates will stay higher for longer, as Powell said last week.
But…what ultimately mattered was not the big-picture policy stuff. What took precedence today was that the positioning of market participants into this report was very negative. 👎
The news has been filled with tech stock disasters, the crypto markets exploding, and anxiety about the midterm elections. And because of that, this one slight positive was able to generate enough momentum to squeeze the many shorts in risk assets and treasuries.
Whether or not that continues is the question everyone’s pondering. Because…sticking with our racing analogy…the bulls had the fastest lap and gained some ground today, but the bears are still leading the race. 🏎️
As for the Federal Reserve’s reaction to today’s print, several members had speeches this afternoon. In them, they reiterated that more moderate rate hikes are ahead but that a pause wasn’t likely until the benchmark rate hits 4.50-4.75%. You can check out the full coverage of those speeches here: Esther George, Patrick Harker, and Mary Daly. 💬
Lastly, it’s worth noting there was some international inflation news too. For example, China’s producer price index fell for the first time since December 2020. And the European Central Bank believes peak inflation ‘is almost within reach.’
There’s a lot more progress needed. But for now, a win is a win.