S&P 500: 2.24% DOW: 1.94% NASDAQ: 2.37% 10-YR Yield: 4.44%
What Happened?
In a remarkable turnaround from the challenges of September and October, the S&P 500 marked its third consecutive week of gains, largely fueled by encouraging inflation data. Trading remained sluggish until Tuesday's CPI report unveiled not only a headline figure but also supporting details that affirmed the ongoing trend of disinflation over the last year. Building upon recent Federal Reserve statements, the market interpreted this easing as the conclusion of the current cycle of rate hikes, instilling confidence that victory over inflation is more or less assured. Investors took this a step further, raising their expectations for the Fed to potentially initiate rate cuts as early as May 2024. This sparked a surge of enthusiasm in both stock and bond markets, driving yields down across the curve and propelling equity values higher. As previously noted, while this news on inflation is positive, it might come at the expense of a weakened economy—the likely impetus if the Fed is to pull rates down next year, unless Powell and the team can engineer a "soft landing."
Beneath the surface, all 11 sectors within the S&P 500 recorded positive gains. Sectors sensitive to interest rates, such as Real Estate (+4.6%) and Utilities (+3.3%), saw another surge due to a significant drop in market rates. Staples (+0.8%) and Energy (+1.5%) couldn't quite keep pace with the rest.
The Consumer Price Index (CPI) was unchanged month-over-month and rose 3.2% from a year ago
Both below economist estimates
Core CPI, which excludes food and energy prices, increased 0.2% in October and 4% for the year
Shelter costs gained at only a 0.3% clip; half of September's figure
Energy prices declined 2.5% for the month
The key takeaway - The October CPI report delivered exactly what the markets were hoping for after weeks of uncertain signals from Federal Reserve officials about the possibility of additional tightening to come. The headline figure, showing no increase in month-over-month inflation, was a welcome relief, and the report's details offered reasons for optimism. Core inflation, though still high, continued its consistent downward trend, while shelter costs, a persistent concern in recent reports, finally exhibited signs of slowing. This suggests the potential for a sustained decline in the core figure. For investors, this data might signal the end of the tightening cycle, potentially giving the Federal Reserve room to step back. There's speculation in the markets that this disinflationary trend could persist, offering the Fed an opportunity to lower rates as early as next year if economic challenges arise.
U.S. retail sales fell 0.1% in October from a month earlier, the first decline since March
Sales rose 0.9% in September
Auto dealerships and other big ticket retailers saw purchases fall
Sales also declined in October at department, hardware and furniture stores
Receipts rose at restaurants, bars, and online retailers, but at a slower pace
The key takeaway - After a robust summer marked by strong retail spending and a hot 4.9% GDP growth rate in the third quarter, the October retail sales report suggests a potential slowdown in momentum. Data indicates that Americans have started to scale back on major purchases due to the significant increase in borrowing costs. There's a broader concern regarding discretionary spending as some major retailers, such as Target and Home Depot, have cautioned about a potential decline in customer spending. This trend coincides with the resumption of student loan payments and signs of weakening employment. As the holiday season approaches, many predict less impressive performance compared to previous years. However, while there are hints of a slowdown, there isn't sufficient evidence to suggest a substantial blow to the economy. If it can navigate this cooling phase without freezing, there's potential for reduced inflationary pressure and the possibility of a "soft landing."
Construction of new homes rose 1.9% in October to a 1.37 million annual pace
Figure is above both estimates and the previous month's result
The construction pace of single-family homes rose by 0.2% in October, and apartment construction rose by 4.9%
Construction rose in the Midwest and West while falling in the Northeast
The key takeaway - Amidst the structural shortage of supply in the existing home market, homebuilders have proactively filled the void to cater to potential buyers. This persists even amid the exceptionally high mortgage rates recorded in October during the data collection period. However, despite the imperative for increased supply, homebuilders haven't been immune to the effects of higher borrowing costs. They've resorted to offering favorable terms to entice demand. There's a chance that this upward trajectory may persist in the upcoming months, given the significant drop in market interest rates, attracting buyers who have been waiting on the sidelines for such an opportunity.
From Around The Watercooler
United Auto Workers members voted to ratify the contract with General Motors, granting them historic wage gains and other perks following their six-week strike
Microsoft debuted its first AI chips in a potential effort to compete with Nvidia’s dominance
SpaceX got FAA clearance to launch a second Starship flight, clearing the way for an attempt Saturday
More than two-thirds of the House voted in support of new Speaker Mike Johnson’s funding plan; avoiding a government shutdown
