Weekly Market Update: November 21, 2022
The October price data may prove to be an inflection point in the battle to tame inflation. The Consumer Price Index (CPI) rose 0.3% and 7.7% on a month-to-month and 12-month basis, respectively. Likewise, the Producer Price Index increased a modest 0.2% in the one- month period ending October 31st. Those readings, though still elevated, came in below expectations.Treasury market yields and the value of the U.S. dollar fell on the reports, which also sparked a notable equity market rally.
The moderation in prices is raising sentiment that the Federal Reserve will reduce the size of its interest-rate increases. The Wall Street consensus is now calling for a half-point hike to the federal funds rate at the December Federal Open Market Committee (FOMC) meeting. However, this remains a fluid situation and there will be more readings on inflation, including the November CPI report, before next month’s FOMC meeting.
Several Fed officials have pushed back on speculation that the central bank is nearing the end of its hiking cycle. After the November monetary policy decision, Federal Reserve Chairman Powell said the federal funds rate (currently 3.75% to 4.00%) may need to hit 5.00% by mid-2023 and stay at that level for a longer duration to reduce demand and ultimately push prices lower.
However, the Fed’s goal to stabilize prices may come at the consequence of a weaker U.S. economy. The restrictive monetary policies have pushed borrowing costs to levels not seen in years and that is hurting the U.S. housing market and the homebuilding industry. The U.S. consumer, though, has proven resilient amid the price inflation. We recently learned that October retail sales climbed 1.3% after a flat reading in September, and mass merchandisers Home Depot and Walmart posted better-than-expected quarterly results. The Fed will be closely monitoring the U.S. consumer sector, given its contribution to the nation’s Gross Domestic Product.
Conclusion: The equity market has rallied on the recent pullback in Treasury market yields and the U.S. dollar. However, we would still not throw caution to the wind, as the variables that have worried investors remain in place, including the Federal Reserve raising rates into a period of likely slowing economic and corporate earnings growth.