Inflation data raises doubts over whether Fed will ‘stay the course’: Morning Brief

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Friday, November 11, 2022

Today’s newsletter is from Jared Blikre, a market-focused reporter at Yahoo Finance. Follow him on Twitter @SPYJared. Read this and other market news wherever you are with Yahoo Finance app.

Stocks and bonds had a particularly bullish reaction new data Thursday showing that inflation continues to moderate after hitting a 40-year high over the summer.

The Dow (^ DJI), the Nasdaq (^IXIC), S&P 500 (^GSPC) and Russell 2000 (^RUT) each had their best day since the 2020 pandemic lows. The 5- and 10-year Treasuries (^ F.V.X., ^TNX) saw its biggest drop in one-day yields since Fed Chairman Ben Bernanke ramped up quantitative easing in March 2009.

A casual observer could be forgiven for thinking that the Fed whipped inflation. While the United States is far from its inflation target of 2%, inflation fell more than expected last month. The consumer price index rose 0.4% in October against expectations of a 0.6% gain, while the year-over-year measure fell to 7.7% against 7.9%. Excluding food and energy, core inflation also rose in October, but less than expected.

Federal Reserve Board Chairman Jerome Powell holds a press conference after Powell announced that the Fed had raised interest rates by three-quarters of a percentage point as part of their ongoing efforts to combat the inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz

Will that be enough for Fed Chairman Jay Powell to change his tune and slow the pace of interest rate hikes? Echoes of a “Powell pivot” could be heard on Twitter as stocks soared across sectors and industries. Although inflation remains stubbornly high, the better-than-expected CPI numbers prompted some investors to start taking risks again.

Optimism throughout 2022 has fueled outsized market moves like these. So far, market participants have misjudged as new lows in major indices have followed every major rally.

Powell, for his part, has pledged to raise interest rates, even if it hurts parts of the economy. At his last press conference, Powell bluntly stated that he was more concerned about “entrenched” inflation than the risks of the Fed continuing on its hawkish course – the main danger being a recession.

This determination has not deterred investors from hoping that the Fed will halt rate hikes as soon as possible.

Alfonso “Alf” Peccatiello, founder and CEO of The Macro Compass, told Yahoo Finance on Thursday that the bonds are priced at a lower Fed Funds terminal rate — or the rate at which the Fed stops climbing. He also pointed out that bond volatility is “falling like a rock” and credit spreads have tightened. These signs encourage all investors to take more risk, at least in the short term.

“With this impression of inflation,” Peccatiello said, investors “become less and less confident that the Fed will stay the course.”

What to watch today


  • 10:00 a.m. ET: University of Michigan Consumer SentimentNovember Preliminary (59.5 expected, 59.9 in previous month)

  • 10:00 a.m. ET: Current University of Michigan TermsNovember Preliminary (expected 62.8, 65.6 in previous month)

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

  • 10:00 a.m. ET: U. of Michigan 1-Year InflationNovember Preliminary (5.1% expected, 5.0% in previous month)

  • 10:00 a.m. ET: U. of Michigan 5-10 Year InflationNovember Preliminary (2.9% expected, 2.9% in previous month)


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