Market Monitor: November Mid-Month Update
Headlines and Highlights
- Inflation decelerates to slowest pace since January: The annual inflation rate as gauged by the Consumer Price Index fell to a nine-month low of 7.7% in October from 8.2% a month earlier – still high but lower for a fourth straight month. Core CPI, which excludes the volatile energy and food sectors and is viewed as a better underlying indicator of inflation, dipped to 6.3% from 6.6% in cutting its month-over-month rise in half to 0.3%. Lower prices for medical care and used cars spurred the decrease while shelter costs contributed more than half the increase.
- Markets rally on inflation data and Fed hopes: Most asset classes are higher this month thanks to an outsized surge in response to the improved inflation outlook, which boosted investor optimism about the Federal Reserve slowing interest-rate hikes soon. Thursday was just the 18th time this century that the Standard & Poor’s 500 Index rose 5% or more in a day. International investments increased even more with a boost from the weaker dollar. The benchmark for international developed stocks added 9.3% in the first half of November, compared to 2.3% for their U.S. peers (S&P 500); emerging-markets stocks climbed 10.8%, and international REITs jumped 10.5%. Taxable and municipal bonds added back 1.7% and 1.5%, respectively.
- Midterm elections appear to have produced a divided Congress, with Democrats clinching control of the Senate and Republicans expected to secure a narrow House majority once all votes are counted. That scenario often has been better for markets than when either major party holds sole control. Any gridlock is likely to help keep spending in check, although the Democrats may push for a large spending package and an increase in the debt ceiling in the lame-duck session while they hold sway in both houses.
Chart of Interest
Headed in the right direction: Consumer price inflation is moving further down from the peaks.
Sources: Federal Reserve of St. Louis, Altair Advisers
- Inflation is likely to continue a gradual downward path, despite ongoing price pressures in the service sector – the main driver of inflation right now. Most secondary measures of inflation, including the Producer Price Index along with data from manufacturers and small businesses, have been showing weaker momentum for several months.
- The Federal Reserve is now expected to make an interest-rate hike of half a percentage point at its December 14th meeting, based on trading in fed fund futures – following four consecutive increases of three-quarters of a point. The Fed will require a couple more meaningful declines in the monthly inflation rate before it stops raising interest rates.
- The better-than-anticipated total of jobs added in October by S. employers (261,000) highlighted how the job market continues to defy expectations in an economy challenged by high inflation and rising rates. Hiring remains strong but has moderated from the peak in late 2021; further moderation could help persuade the Fed to ease up on interest-rate increases if it sees sufficient evidence of the economy cooling.
- The U.S. dollar’s recent decline against other currencies accelerated dramatically following last week’s inflation report as investors bet that easing inflation will allow the Fed to slow its rate hikes. The dollar index (DXY) had the fourth-largest weekly decline (4.1%) of its 50-year history last week, though it remains up about 11% for 2022.
- Technology stocks were big winners in the extreme move in markets last week as they try to reverse the momentum in what has been a particularly poor year for tech. The tech-heavy Nasdaq Composite had its largest one-day jump (7.4%) since the March 2020 rebound from the pandemic crash. The rebound followed a brief pullback caused by concerns that a cryptocurrency crisis involving failed crypto exchange FTX could spill over into tech stocks – contagion that failed to develop.
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