Lower But Still Not Low

Muddied midterm election results and a failing crypto exchange would normally dominate the market headlines for the week. However, they both took a backseat to the inflation data that came out on Thursday.

The Labor Department on Thursday said that its consumer-price index increased 7.7% in October from the same month a year ago, which is the smallest 12-month increase since January 2022. The reading was down from 8.2% in September. The core CPI—which excludes volatile energy and food prices—climbed 6.3% in October from a year earlier, down from 6.6% in September, which was the biggest increase since August 1982.

Consumer-price index, 12-month change

Stocks and bonds both rallied on this news. And what a rally it was. The Dow gained 1201 points, the S&P was up 5.55% and the beleaguered NASDAQ was up 7.35%. However, the more stunning moves occurred in the bond market where the 10-year treasury yield fell from 4.11% to 3.83% and the 2-year fell from 4.61% on Wednesday to 4.33% after the news. Rarely do you see moves of this magnitude with shorter term maturities

The rally in financial markets usually doesn’t happen with a single data point like it did on Thursday. Did the markets overreact? Possibly. However, this one data point may have signaled that the U.S. economy was past peak inflation, which would be very comforting to investors and the Fed. (June’s 9.1% inflation rate was the highest rate in four decades.) The data point also gives the Fed some optionality. If this trend continues, can they begin to reduce the magnitude of future interest rates? I.e., will they raise rates by 50 basis points, rather than the fourth 0.75% increase at the December 13-14 Fed meeting? To be clear, the CPI data was lower, but it is still not low. At 7.7%, it is still much higher than the Fed’s target of 2.0%.

As it relates to the election, it is likely we will have a divided government with the Republicans regaining the House, and the Senate set for a showdown in Georgia which will have a runoff election on Dec. 6th. A divided government will hamper the ability to enact parts of President Biden’s economic agenda. Historically, markets value the kind of certainty that divided government tends to deliver, which is few major policy changes or tax-code overhauls. While the Georgia Senate race may dominate the news headlines, it should not have as much of an impact on the financial markets if, as expected, the House flips to Republican.

What would a wild week be if we didn’t mention crypto? It is truly remarkable to see the expedient downfall of FTX, a crypto exchange run by Sam Bankman-Fried and promoted by NFL QB Tom Brady. An old-fashioned run on the crypto exposed some holes in the platform. Unlike a bank run, there is no Federal Reserve or safety net to help them out. The events in the crypto world the past week will no doubt make for a good book or podcast series in the coming years.

Source: Factset, The Wall Street Journal

The opinions expressed are those of Harrison Financial Services as of November 10, 2022 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.