The economy survived the government shutdown but all is not well
The U.K. government’s upcoming budget will focus on lowering inflation and paving the way for the Bank of England to lower its key interest rate, treasury chief Rachel Reeves said Tuesday.
In a speech, Reeves also said the Nov. 26 budget would aim to lower the government’s debt, but also protect public services. She didn’t rule out a rise in taxes on households, which many economists see as the only option left to the government if it is to achieve its other goals.
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Paul Hannon
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The U.K.’s annual rate of inflation in September unexpectedly held at the pace of the previous month, raising the chance that Bank of England policymakers could cut interest rates later this year, despite price rises remaining at a level still well above the central bank’s target.
Consumer prices were up 3.8% compared with the same month of last year, the Office for National Statistics said Wednesday, almost double the central bank’s 2% target and the same rate as August. Economists polled by The Wall Street Journal expected a higher rate of 4.0%.
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Ed Frankl
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China’s downward price pressures eased slightly in September, but not quite as much as expected, as Beijing ramps up efforts to curb excess capacity and bolster domestic demand.
Data showing continued deflationary pressure in China comes as Premier Li Qiang renewed calls to double down on efforts to boost consumption, and crack down on pricing competition among businesses.
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Annual inflation picked up pace in France at the end of the summer, despite a political stalemate holding back economic activity, as the European Central Bank looks likely to keep interest rates untouched.
Consumer prices rose 1.1% on year this month, EU-harmonized figures published by the country’s statistics authority showed Tuesday. That was a little less than economists had expected and keeps the rate below the 2% level targeted by the ECB, but nonetheless marks an increase to the fastest rate of annual inflation since the beginning of the year.
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Joshua Kirby
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Two years ago, Argentines elected the radical libertarian Javier Milei as president with a mandate to fix the country’s chronically high inflation.
The odds didn’t look good. Previous presidents had failed to address one of inflation’s root causes: government deficits. Without access to capital markets, Argentina often turned to the central bank to finance its deficits by printing money. Efforts to rein in spending were stymied by resistance in Congress and by the public.
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[ad_2] Greg Ip
U.S. stock indexes were edging higher on Wednesday with technology stocks looking to extend gains ahead of the December inflation report, which is expected to shed more direct light on when the Federal Reserve could dial back its two-year-long effort to tighten monetary policy and cool the economy.
On Tuesday, the Dow industrials fell 0.4%, to 37,525, while the S&P 500 declined 0.2%, to 4,757, and the Nasdaq Composite gained less than 0.1%, to 14,858.
Inflation and its impact on bond markets and the Federal Reserve’s monetary-policy trajectory are the primary focus for markets this week as investors remain on hold ahead of Thursday’s December inflation reading and high-profile corporate earnings reports on Friday, when some of the big banks will kick off the fourth-quarter 2023 earnings season.
The S&P 500 sits less than 0.7% shy of its record high of 4796.6 touched a little over two years ago, after rallying strongly in the last few months primarily on hopes that easing inflation will allow the Fed to lower interest rates sooner and faster than the markets previously anticipated.
The yield on the 10-year Treasury
BX:TMUBMUSD10Y,
the benchmark for borrowing costs, has fallen from 5% in October to 4.014% on Wednesday.
But for this bullish narrative to play out, inflation must be seen continuing to fall back to the central bank’s 2% target. That’s why great importance is therefore being placed on the consumer-price index for December, which will be published at 8:30 a.m. Eastern on Thursday.
See: These traders bet on surprise blip higher in key December inflation reading
Economists forecast that annual headline CPI inflation inched up to 3.2% last month from 3.1% in November. The core reading, which strips out more volatile items like food and energy, is expected to fall from 4% to 3.8%.
Adam Phillips, director of portfolio strategy at EP Wealth Advisors, said the CPI report may give investors enough confidence that the disinflation is likely to continue, even if the price levels are “still a very long way from anything that is considered healthy.”
However, he cautioned that the economy has “certain factors” that are beyond the Fed’s control, such as the volatility in supply chains and growing geopolitical risks, as well as a potential resurgence in inflation, he told MarketWatch via phone on Wednesday.
“[E]quities have remained broadly range-bound since just before Christmas, with little to push them in either direction,” said Jim Reid, strategist at Deutsche Bank.
“That might change soon, since we’ve got the U.S. CPI print tomorrow, and then the start of earnings season on Friday, but for now at least, there’s been few headlines for investors to latch onto, just a bit of indigestion after over exuberance before New Year left markets with a little bit of an extended hangover,” Reid added.
In U.S. economic data, the wholesale inventories declined 0.2% in November, in line with Wall Street expectations, as manufacturers continue to juggle with a fragile economy, according to the Commerce Department.
New York Fed President John Williams will speak in White Plains, N.Y., at 3:15 p.m. Eastern time.
Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.
All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
SPX
and Nasdaq Composite
COMP
also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view.
It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.
Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy.
Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.
Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.
Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
DB,
counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong.
Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion.
Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”
The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to 3.2% year-on-year in November from a 4.2% annual rate in July.
The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.
Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.”
History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle. However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
BX:TMUBMUSD02Y,
10-
BX:TMUBMUSD10Y,
and 30-year yields
BX:TMUBMUSD30Y
ending Friday at their highest levels in more than two to three weeks.
See also: What history says about stocks and the bond market ahead of a first Fed rate cut
While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.
“We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone.
December’s CPI report on Thursday is the data highlight of the week ahead.
On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month.
Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams.
Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out.
Updated Jan. 1, 2024 12:05 am ET
A surprise surge in American oil and gas production and exports is helping to keep the world stocked, blunting the impact of widening conflict in the Middle East that has crimped key shipping lanes.
When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk about 5% and 23%, respectively.
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Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance.
But as the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time.
And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch.
Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds.
“The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”
Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients.
The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement.
However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks.
At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show.
More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500
SPX
have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data.
The Bloomberg U.S. Aggregate Total Return Index
AGG
has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.
But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index.
The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024.
Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others.
The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors.
A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.
But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels.
Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices.
There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close.
“The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said.
Read: Fed could be the Grinch who ‘stole’ cash earning 5%. What a Powell pivot means for investors.
Developing story. Check back for updates.
The numbers: The cost of imported goods fell 0.4% to mark the second decline in a row, contributing to a slowdown in U.S. inflation more broadly.
Economists polled by the Wall Street Journal had estimated a 0.8% drop.
Recession fears are rising. Nothing beats fear better than good information and that’s what we will get this week. Investors and economists will get good insight into the mood of U.S. consumers and hear the last words of Federal Reserve Chair Jerome Powell ahead of the central bank’s next interest-rate meeting on Dec. 12-13.
Economists surveyed by the Wall Street Journal expect that consumer’s view on the outlook have soured over the past few weeks. Geopolitical…
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Financial markets were jubilant over Tuesday’s data showing that U.S. consumer prices eased by more than expected in October, with Treasury yields plummeting on expectations the Federal Reserve will refrain from raising interest rates further and might even lower borrowing costs.
In a nutshell, financial conditions suddenly became looser, with the benchmark 10-year yield
BX:TMUBMUSD10Y
at 4.46% in New York afternoon trading or down by more than half a percentage point from its October peak. Right now, conditions are “much more accommodative” than when Fed officials first suggested higher long-term yields could do the work of tighter monetary policy and take the place of a rate hike, according to Will Compernolle, a macro strategist for FHN Financial in New York.
The jury is out on how much a continuation of looser financial conditions will matter to central bankers. At one point in Tuesday’s session, both the 10-year yield and the policy-sensitive 2-year yield
BX:TMUBMUSD02Y
were heading for their biggest one-day declines in more than six months as traders revved up expectations for at least four Fed rate cuts in 2024.
Tuesday’s October CPI inflation report “will be very welcome to the Fed, though it will inevitably make the Fed’s challenge of restraining market optimism and financial conditions more difficult too,” according to New York-based advisory firm Evercore ISI.
In a note, Evercore’s Vice Chairman Krishna Guha and others wrote that “the Fed’s challenge is that the market sees this and is trying to jump to the endgame, risking a larger/sooner easing in financial conditions than the Fed itself would like to see under prudent upside inflation risk management principles. So expect Fed officials to maintain a very cautious and relatively hawkish tone.”
Indeed, there’s plenty of reasons to remain careful about reading too much into one report.
After Tuesday’s data, Federal Reserve Bank of Richmond President Thomas Barkin said he’s not convinced inflation is on a clear path toward 2% despite recent progress in curbing price pressures.
Some economists also said October’s CPI report isn’t the game changer that markets think it is. And FHN’s Compernolle said that if the Fed’s favorite inflation gauge, the personal consumption expenditures index (PCE), shows “horizontal momentum” when the October data is released later this month, there could be some on the Federal Open Market Committee “who feel the lower bond yields necessitate a higher fed funds rate.”
Read: Economists in hawkish camp don’t surrender in wake of October consumer-inflation print
At Hirtle Callaghan & Co., a West Conshohocken, Pa.-based firm which manages $18.5 billion in assets, Brad Conger, deputy chief investment officer, said that October’s CPI readings validate the Fed’s “wait-and-see” approach and that “it will take a rather long series of this order of magnitude to give them confidence to ease policy.”
Meanwhile, “we worry that the recent easing of financial conditions and energy prices could easily start to counter the restraint,” Conger wrote in an email on Tuesday.
In addition to a broad-based decline in Treasury yields, all three major U.S. stock indexes
DJIA
COMP
were higher as of Tuesday afternoon. The Dow Jones Industrial Average surged almost 500 points on a buying frenzy as investors also cheered Tuesday’s low “supercore” inflation figure that acts as a proxy for labor costs.
Just last week, Fed Chairman Jerome Powell said that the Fed is wary of “head fakes” from inflation, or temporary improvements that only reverse over time.
If Tuesday’s CPI data for October isn’t a “head fake,” “the Fed may be able to accept a loosening of financial conditions in order to prevent a recession,” said Lawrence Gillum, a Charlotte, North Carolina-based fixed-income strategist for broker-dealer for LPL Financial. “If it is a head fake, then the Fed will talk up the need for higher long-end yields. It will probably take a couple more months of this type of report or better to see whether that plays out.”
U.S. edged lower early Monday ahead of important inflation data in coming days, while gauging the possibility of a shutdown of the federal government at the end of the week.
The Dow, S&P 500 and Nasdaq Composite rose Friday to score back-to-back weekly gains.
The S&P 500 has jumped 7.2% over the past two weeks, helped by benchmark borrowing costs
BX:TMUBMUSD10Y
falling swiftly from 16-year highs on hopes that recent softer jobs data means inflation can ease further and the Federal Reserve has thus finished its campaign of interest rate rises.
However, after that strong rally a more cautious tone prevails at the start of the new week as the market awaits a U.S. consumer-price index report for October, due Tuesday, that thus has the heft to underpin the latest bull run or bring it to a halt.
Read: Stock-market rally faces make-or-break moment. How to play U.S. October inflation data.
Core CPI growth — which strips out volatile items such as food and energy — is expected to remain steady at 0.3% month-on-month. The producer prices report for October will be published on Wednesday.
See: This week’s October inflation data looms large on Washington’s economic radar
October retail sales data is also on the docket this week, offering further clues to the health of the consumer on Wednesday.
“Most eyes will be focused on the latest inflation numbers, but retail sales and retail earnings will also help set the tone,” Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, said in emailed comments.
He warned that the market “may be a little more jittery than usual,” following a downgrade of the U.S. credit outlook by Moody’s Investors Service and the possibility of a shutdown of the federal government at the end of the week.
Also see: House Republicans look to pass two-step package to avoid partial government shutdown
Worries over a dysfunctional government contributed to Moody’s Investors Service late Friday cutting its outlook on the U.S. sovereign credit rating to negative from stable.
“This week, we will plunge back into the U.S. political saga, as the government short-term funding deadline is due 17th of November and not much progress has been made to seal a fresh deal,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Depending on the new funding resolution – or the lack thereof – we could see the U.S. 10-year yield return above 4.80%,” Ozkardeskaya added.
Investors will also be keeping an eye out for a slew of earnings reports from retailers, including Home Depot Inc.
HD,
on Tuesday, Target Corp.
TGT,
on Wednesday and Walmart Inc.
WMT,
on Thursday. Their comments on the health of the consumer may also play into thinking on the Fed.
Indeed, the earnings season in general should have provided fundamental support to investor sentiment, according to analysts. “For Q3 2023, with 92% of S&P 500 companies reporting actual results, 81%…have reported a positive earnings per share surprise and 61%…have reported a positive revenue surprise,” said John Butters, senior earnings analyst at FactSet.
The U.S. federal budget update for October will be published at 2 p.m. Eastern. Fed Governor Lisa Cook was due to deliver opening remarks at a Fed conference Monday morning.
It has been a while since a hot inflation report sparked wild gyrations in U.S. stocks, like it frequently did in 2022, but that doesn’t mean Tuesday’s consumer price index for October is destined to be a snooze-fest for markets.
To the contrary, some Wall Street analysts believe it is possible, even likely, that the October CPI report could emerge as a critical catalyst for stocks, with the potential to propel the market higher on a softer-than-expected number.
At least one prominent economist expects the data to show that consumer prices were largely unchanged last month, or even fell.
“I would not be surprised to see a negative CPI inflation print for October,” said Neil Dutta, head of economics at Renaissance Macro Research, in commentary emailed to MarketWatch.
“After all, retail gasoline and heating oil prices declined a little over 10% over the month and we know that energy, while representing a small share of total CPI, roughly 7%, can account for a large chunk of the month-to-month swings in CPI.”
The October CPI report arrives at a critical juncture for markets. Investors are trying to anticipate whether the Federal Reserve will follow through with one more interest rate increase, as it indicated in its latest batch of projections, released in September.
Speaking on Thursday, Federal Reserve Chairman Jerome Powell left the door open to another move, but qualified this — as the Fed almost always has — by insisting that whatever the Fed decides, it will ultimately depend on the data.
These comments added even more emphasis to next week’s data, said Thierry Wizman, Macquarie’s global FX and interest rate strategist, in commentary emailed to MarketWatch on Friday.
“Our own view — expressed over the past few days — is that the Fed — and by extension the fixed-income markets — won’t be anticipatory. Rather, the Fed will be highly reactive to the data,” he said. “The next milestone is…CPI. It is likely to have a calming effect on markets, as traders weigh the prospect that a very low headline CPI result will further cool the prospect of excessive wage demands in the labor market.”
While assessing the potential impact of a soft inflation report next week, at least one market analyst expects the market’s reaction to the June CPI report, released on July 12, might serve as a helpful template.
Stocks touched their highest levels of the year within that month, as many interpreted the slower-than-expected increase in prices as an important turning point in the Fed’s battle against inflation. The S&P 500 logged its 2023 closing high on July 31, according to FactSet data,
Tom Lee, who anticipated both the outcome of the June CPI report and the market’s reaction, told MarketWatch that, at this point, inflation would need to meaningfully reaccelerate to have an adverse impact on the stock market.
The upshot of this is that the risks for investors heading into Tuesday’s report are likely skewed to the upside. Even a slightly hotter-than-expected number likely wouldn’t be enough to derail the market’s November rebound rally. While a soft reading could reinforce expectations that the Fed is done hiking rates, likely precipitating a rally in both stocks and bonds.
“I’d say the setup looks pretty favorable,” Lee said.
Even a modestly hotter-than-expected number likely wouldn’t be enough to derail the market’s November rebound.
“I think the reaction function is changing for the stock market,” Lee said.
“Because the Federal Reserve and public market kind of viewed the September CPI as a pretty decent number, and Powell even referred to it as such. Earlier in 2023, I think people would have viewed it as a miss.”
U.S. inflation has eased substantially since peaking above 9% on a year-over-year basis last summer, the highest rate in four decades. The data released last month showed consumer prices climbed 0.4% in September, softer than the 0.6% from the prior month, but still slightly above expectations.
However, the more closely watched “core” reading reflected only a 0.3% increase, which was in-line with expectations.
There is a perception on Wall Street and within the Federal Reserve that driving inflation down from 3% to the Fed’s 2% target could pose more difficulty for the Fed. After all, most of the easing from last summer’s highs was driven by falling commodity prices and supply-chain normalization as the economic impact of the COVID-19 pandemic faded.
Powell has repeatedly warned of a “bumpy ride,” and he reiterated on Thursday that the battle against inflation is far from over.
See: Powell says Fed is wary of ‘head fakes’ from inflation
Inflation data released this month, and in the months to come, could help to define investors’ expectations for how long this “last mile” might take, helping these reports regain their significance for markets.
“I like a calm market, but I think CPI is coming more in focus these days now that we’re getting closer to that 2% target,” said Callie Cox, U.S. investment analyst at eToro, during a phone call with MarketWatch.
Since the start of 2023, the S&P 500 index hasn’t seen a single move of 1% or greater on a CPI release day, according to FactSet data. By comparison, the biggest daily swings seen in 2022 occurred on CPI days, with the large-cap index sometimes swinging 4% or more in a single session.
Economists polled by FactSet expect consumer prices rose 0.1% in October, following a 0.4% bump in September. They expect a 0.3% increase for core prices, which excludes volatile food and energy. Powell has said that he’s keeping a close eye on core inflation, as well as so-called “supercore” inflation, which measures the cost of services inflation excluding housing.
To be sure, the CPI report isn’t the only piece of potentially market-moving news due during the coming week. Investors will also receive a monthly update from the Treasury that includes data on foreign purchases and sales of Treasury bonds, as well as a flurry of other economic reports, including potentially market-moving readings on housing-market and manufacturing activity.
There is also the producer-price index, another closely watched barometer of inflation, which is due out Thursday.
U.S. stocks have risen sharply since the start of November, with the S&P 500
SPX
up more than 5.3%, according to FactSet data.
MarketWatch photo illustration/iStock
U.S. inflation data for October is clearly the economic highlight for markets, economists and policymakers this coming week. That’s because if price pressures continue their cooling trend from the summer, the Fed might be able to refrain from any more interest-rate hikes.
Here’s a preview of the inflation report and other critical data and events that will have the markets’ attention this week.
See: MarketWatch’s comprehensive economic calendar
No economic reports matter more for the Federal Reserve’s interest-rate policy outlook than consumer inflation data. Inflation has been trending down since the summer, but many economists are wary that most of the progress was low-hanging fruit, and that it will take a lot to get back to the Fed’s 2% target. Fed Chairman Jerome Powell raised this concern in remarks on Thursday, saying the central bank was concerned about inflation “head fakes.”
Economists polled by the Wall Street Journal expect headline CPI to moderate to a 0.1% rise in October, down from a 0.4% gain in the prior month, and the smallest increase since May.
Over the past year, inflation is expected to rise at a 3.3% rate, down from 3.7% in the prior month.
The improvement is expected to come mainly from gasoline prices.
Core CPI, excluding volatile food and energy prices, is expected to rise 0.3%, matching a 0.3% gain in the prior month. The year-over-year rate is seen holding steady at a 4.1% annual rate.
Economists expect retail sales to be weak, falling 0.1% in October after a 0.7% jump in September and a 0.8% gain in August.
The outlook for consumer spending is one of the most intriguing questions about the outlook.
Will the strong spending seen in the late summer fade away? With above-trend job growth and incomes rising, there seems no reason for consumers to pull back sharply. But many economists think that consumers are running out of excess spending power built up during the pandemic.
Also see: Retail earnings begin this week. ‘It’s getting worse,’ an analyst says.
There are just under 20 public remarks from Fed officials scheduled this week. One of the highlights will be Chicago Fed President Austan Goolsbee’s moderated question-and-answer session before the Detroit Economic Club.
Goolsbee, who joined the Fed at the beginning of the year, is comfortable speaking in public and on television from his days in the Obama administration, and afterwards as a pundit. His views also carry weight because he will be on any short list of potential replacements for Powell if President Joe Biden wins a second term.
Goolsbee has looked prescient so far. In his first public speeches this summer, he suggested that there could be an improvement in inflation without a big rise in unemployment.
Biden and Xi will meet for the first time in a year at the Asia-Pacific Economic Cooperation summit in San Francisco, amid struggles in the Chinese economy and the recent strengthening of ties between XI and Russian Vladimir Putin.
Derek Scissors, a senior fellow at the American Enterprise Institute, said investors should not expect anything market-moving from the talks. The Biden administration simply wants to get face time with Xi, he said.
“The goal is to find out how to reach him, who are you supposed to talk to [to reach him in the future], and then have a good conversation with him where Biden can say a few things that we think he really needs to hear from us,” Scissors said.
Gone are the days when the U.S. and China cooperated on economic issues, he said.
Xi simply doesn’t care that much about the economy, Scissors said. He is more focused on “really strict party control of everything,” he added.
The federal government will run out of money late Friday unless Congress passes legislation to keep the lights on.
It is the first test for new House Speaker Mike Johnson. He has proposed a two-step government spending plan to keep the government open until early next year, but it remains uncertain whether this will break the logjam.
Late Friday, Moody’s Investors Service lowered its outlook on the U.S. credit rating to “negative” from “stable.”
This is actually positive for the prospects of a congressional deal, said Terry Haines, founder of Pangaea Policy, a political forecasting firm.
Haines said he has lowered the odds of a government shutdown to 30% from 40% before the Moody’s move.
“The last thing House Republicans should want to do…is show newly skeptical markets that they can’t even handle a continuation of government funding,” Haines said, in a note to clients.
Many borrowers with subprime credit have been paying 17% to 22% rates on new auto loans this year as the Federal Reserve’s inflation fight takes a toll on lower-income households.
That borrowing range reflects the average cost, or annual percentage rate, for a loan in recent subprime auto bond deals, according to Fitch Ratings, an increase from last year’s average APR of closer to 14%.
Higher borrowing costs can mean households need to put more of their income into monthly auto payments, ramping up the risks of late payments, defaults and car repossessions. Those risks, however, have yet to make investors flinch.
The subprime auto sector already has cleared almost $30 billion of new bond deals this year, according to Finsight, a pace that’s slightly below volumes from the past two years, but still above historical levels since 2008.
Finsight
“I do believe there has to be a reckoning if rates stay higher for longer,” said Tracy Chen, a portfolio manager on Brandywine Global Asset Management’s global fixed income team.
Figuring out when the tumult might hit has proven difficult. Instead of slowing, the economy has shown resilience despite the Fed lifting its policy rate to a 22-year high of 5.25% to 5.5%. The central bank also indicated it might need to keep rates higher for some time to fight inflation. Longer-duration bond yields, as a result, have pushed higher, but still hover below 5%.
Inflation eats away at paychecks, especially those of lower-wage workers, a problem the Fed hopes to solve by keeping borrowing rates elevated. A gauge of inflation out Thursday showed consumer prices were steady at a 3.7% yearly rate in September, above the Fed’s 2% target.
“This recession has been on everyone’s mind for the past three years,” Chen said. While she thinks the economy will likely contract in the middle of 2024, a lot of damage could be done before that. “The longer rates stay here, the harder the landing.”
For now, the Fed is widely expected to hold rates steady at its next meeting in November. “Fed policy makers are now shifting their focus from ‘how high’ to raise the policy rate to ‘how long’ to maintain it at restrictive levels,” said EY Chief Economist Gregory Daco, in emailed comments.
Stocks were flat to slightly higher in choppy trade at midday Thursday after the inflation report came in hotter than forecast, with the Dow Jones Industrial Average
DJIA
near unchanged and the S&P 500 index
SPX
up 0.2%.
Past recessions and the burden of higher interest costs typically hit lower-wage workers harder, making subprime credit a canary in the coal mine for the rest of financial markets. Even so, investors in subprime auto bonds have yet to demand significantly more spread, or compensation, to offset potentially higher defaults among these borrowers.
Related: Subprime auto defaults on path toward 2008 crisis levels, say portfolio managers
Take the AAA rated 2-year slice of a new bond deal issued in mid-October by one of the subprime auto sector’s biggest players. It priced at a spread of 115 basis points above relevant risk-free rate, up from a spread of 90 basis points on a similar bond issued in August, according to Finsight, which tracks bond data.
When factoring in Treasury rates, the yield on the bonds bumped up to about 6% and 5.7%, respectively. The shot at higher returns and low delinquencies in subprime auto bonds have likely helped with investor confidence. The rate of subprime auto loans at least 60-day past due in bond deals was about 5% in September, according to Intex, up from historic lows around 2.5% two years ago.
“I think people still feel confident,” Chen said of subprime auto bonds. When putting a recent bond out on a Wall Street list to gauge its market value, she said bids come in right away.
U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.
So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?
“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”
Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.
Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.
At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.
“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”
The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.
Read: Why 5% bond yields could wreak havoc on the market
While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.
“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.
Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.
“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.
U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.
So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?
“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”
Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.
Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.
At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.
“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”
The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.
Read: Why 5% bond yields could wreak havoc on the market
While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.
“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.
Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.
“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.