Markets struggled through Wednesday until Thursday’s CPI report surprised nearly everyone.
Thursday’s release of October CPI (inflation) gave renewed life to a potential Fed pause/pivot in rates. CPI rose only 0.4% in October, lower than the expected +0.6%, but, more importantly, the year-over-year number for CPI came in at 7.7% and it's the 4th consecutive month of declines. When inflation declines by 1.4% or more from its peak, inflation is lower 6 months later by 1.3%, on average (going back to 1948). While Food, Energy, and Goods have declined since the peak, Services is the one component of CPI that has not stopped rising.
The U.S. consumer now has the opportunity for some breathing room, if the Fed will begin easing rate hikes.
Last week, after the good news on CPI, expectations for the December rate hike dropped considerably on the 75 basis point probability and rose on the 50 basis point probability. With the holidays approaching, we will be watching the retail sales numbers to see if there is stability or improvement in consumer spending. U.S. Holiday Sales for 2022 are expected to increase 4-6% year-over-year. This would help 4th quarter GDP, as the Atlanta Fed is projecting that figure to come in at +4.0%. So far, Redbook Sales are ahead of the typical November pace. Corporate buybacks seem to be on pace to continue into year-end. A downward surprise on PPI this week could fuel markets even more heading into year-end.
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