(Bloomberg) --Treasury yields climbed and stocks edged lower as consumer inflation data bolstered speculation on another Federal Reserve rate hike — even if the central bank decides to pause next month.
The S&P 500 halted a four-day advance. Two-year yields, which are more sensitive to imminent Fed moves, rose eight basis points to 5.1%. The dollar advanced. Swap contracts linked to future Fed rate decisions pushed the odds of another quarter-point hike back to about 50% — from closer to 30% on Wednesday — and expectations for the first rate cut shifted toward July from the June meeting.
The so-called core consumer price index, which excludes food and energy costs, increased 0.3% last month. From a year ago, it increased 4.1%, the lowest since 2021. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4%, boosted by energy costs. Forecasters had called for a 0.3% monthly advance in both the overall and core measures.
Wall Street's Reaction to CPI:
- Richard Flynn, managing director at Charles Schwab UK:
"While the lack of a fall in the rate may be disappointing to the Fed, it is likely not surprising following last week's jobs report which showed that the labor market remains hot – a factor that can put upward pressure on prices. As for how this will impact interest rates, at this point, 'higher-for-longer' may be more important than 'how high?' Whether or not the Fed opts for hikes, it's unlikely we'll see rates drop below where they are for as long as the inflation dragon proves difficult to slay." - Jason Pride, chief of investment strategy and Research at Glenmede:
"There's very little in today's CPI report that suggests it's mission accomplished for the Fed getting the inflation genie back in the bottle. Heading into year end, the Fed may still choose to raise rates once more, though it may be attentive to already tightening financial conditions due to the rise in long-term rates over the last few months. There are still several important economic indicators to be seen before the December FOMC, but another rate hike should remain on the table for now." - Giuseppe Sette, president at Toggle AI:
"A mixed report leaves the Fed hanging. CPI rose a tad more than expected, core CPI did the opposite. We could get one more hike, or none at all, but the key point is different: even if CPI was to stabilize at this level and not fall more, Fed rates are already appropriate. The hiking cycle is done for good." - James Rossiter, head of global macro strategy at TD Securities:
"Bottom line is this number is strong enough to keep the market on its toes with respect to another Fed hike. We don't think it'll happen, but the small upside surprise here challenges that view just a tiny bit." - Quincy Krosby, chief global strategist at LPL Financial:
"To be sure, inflation is easing but not at the pace to convince the FOMC that it can declare victory. Moreover, given Chairman Powell's focus on the monetary failures of the 1970's, how patient can the Fed be that inflation is returning towards price stability quickly enough." - Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office:
"Today's slightly-hotter-than-expected CPI and tame weekly jobless claims didn't do anything to move the needle on inflation or the interest rate outlook. The odds may favor the Fed leaving rates unchanged at its November meeting, but rates are still likely to remain high for the foreseeable future. The Fed is going to want to see a renewed, sustained trend of falling prices before it changes its stance." - Jon Maier, chief investment officer at Global X:
"The numbers seem to whisper a tale of caution to the Federal Reserve. With the score elements like shelter showing no sign of relenting, the Fed faces a dilemma. If these inflationary signs persist or amplify, especially with potential surprises in retail sales data, the Federal Reserve may be compelled to adopt a more restrictive stance. On the other hand, if the figures stabilize around these levels, given the recent sharp rise in yields, the Fed might maintain its pause, holding its position, thereby offering some breathing room to the economy. The upcoming actions of the Fed will be pivotal in shaping the financial narrative for the foreseeable future." - Matt Bush, US economist at Guggenheim Investments:
"We don't expect any more hikes. I don't think this report was surprising enough to move the needle. Over the past few days we've heard multiple speakers from the Fed, including governors Jefferson and Waller, acknowledge that the tightening of financial conditions from higher long-term rates have done a good amount of the work for the Fed, meaning they don't have to hike because longer term rates have tightened enough. So particularly with rates rising after this report, I don't think they're going to see a great need to come out and hike at the Nov. 1 meeting. And beyond that, we're going to see signs of a slower economy throughout the fourth quarter, a weaker labor market and that will take more pressure off them to hike again." - Gina Bolvin, president of Bolvin Wealth Management Group:
"The CPI headline is hotter than expected but the surge in yields, rising gas prices and terrorist attack on Israel will allow the Fed—and the market- to tolerate this data. I think they will pause in November." - Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:
"The bond market is sending a message that it is still worried about inflation and that the Fed will make good on its promise to keep rates higher for longer. We believe it's a coinflip as to whether or not the Fed raises rates on Nov. 1 because the Jobs number on Friday and the inflation data this week were both higher than expected, but also because the Fed is also worried about tightening too much, and you could see in the Fed minutes yesterday that they see risks balanced from both raising rates or leaving rates unchanged (e.g. threatening the economic expansion or allowing inflation to run too hot)." - Andrew Patterson, senior economist at Vanguard:
"While headline inflation was a bit stronger than anticipated last month, nuance matters. Core prices continued to ease, falling to a 4.1% YoY pace from 4.3% last month, which will be welcome by the Fed, though housing costs accelerated a bit. Trends there will be watched closely given tightness in the housing market despite high policy and mortgage rates. We have greater conviction in our higher-for-longer call than the number of additional hikes that will be needed." - Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management:
"To hike or to hold? With the Fed's dual mandate of maximum employment and price stability, the large upside surprise on the most recent payrolls reading (336,000) placed even larger significance on today's CPI print to help inform the Fed's next decision to hold or hike. It is likely inflation will surprise the Fed to the downside in 2023, boosting its confidence that monetary policy has been sufficiently restrictive.
"Today's data supports being close to the end of the hiking cycle as the US economy remains on a disinflation path, which has been supported by recent Fedspeak and the recent tightening in financial conditions. We view yields as attractive in the front-end of the US Treasury curve and continue to find value in high-quality corporate and securitized bonds with short to intermediate durations."
Oil climbed after OPEC+ leaders Saudi Arabia and Russia reaffirmed their close cooperation in the crude market with a public show of unity, and traders monitored events in Israel and Gaza.
Global financial markets are discounting the risk of a "massive conflict throughout the Middle East for now," economist Nouriel Roubini said.
Investors expect Israel "has no choice but go into Gaza and get rid of Hamas," Roubini told Bloomberg's Francine Lacqua on the sidelines of the annual meetings of the International Monetary Fund and the World Bank in Marrakech, Morocco. Markets are pricing in a baseline scenario in which "Israel occupies Gaza, it's going to get ugly, but the conflict remains contained."
Corporate Highlights
- Delta Air Lines Inc. quarterly earnings beat analysts' estimates, but the carrier cut the high end of its outlook for 2023 profit on rising fuel prices and larger-than-expected aircraft maintenance costs.
- Walgreens Boots Alliance Inc. prepared for the arrival of its new chief executive officer with a $1 billion cost-cutting program while it issued 2024 profit guidance shy of Wall Street estimates.
- Ford Motor Co. became the latest strike target for the United Auto Workers after members walked out of its largest plant, a highly profitable pickup factory in Kentucky.
- Target Corp. climbed following an upgrade to buy at Bank of America Corp., which sees an improved risk profile for the retailer based on recent pullback in the stock.
- Domino's Pizza Inc. reported revenue for the third quarter that missed the average analyst estimate.
- Beyond Meat Inc. dropped after Mizuho Securities cut the recommendation to underperform, pointing to macroeconomic pressures for consumption and a "lack of disruptive innovation" in the area.
- Infosys Ltd. narrowed its sales forecast for the fiscal year, a sign that corporations are continuing to curtail spending on software and information technology projects.
Key events this week:
- China CPI, PPI, trade, Friday
- Eurozone industrial production, Friday
- U.S. University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan, Wells Fargo, BlackRock results as the quarterly earnings season kicks off, Friday
- G20 finance ministers and central bankers meet as part of IMF gathering, Friday
- ECB President Christine Lagarde, IMF Managing Director Kristalina Georgieva speak on IMF panel, Friday
- Fed's Patrick Harker speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.2% as of 9:56 a.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average fell 0.3%
- The Stoxx Europe 600 rose 0.2%
- The MSCI World index fell 0.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 0.7% to $1.0550
- The British pound fell 0.7% to $1.2231
- The Japanese yen fell 0.3% to 149.58 per dollar
Cryptocurrencies
- Bitcoin was little changed at $26,733.2
- Ether fell 1.2% to $1,545.23
Bonds
- The yield on 10-year Treasuries advanced eight basis points to 4.64%
- Germany's 10-year yield advanced five basis points to 2.77%
- Britain's 10-year yield advanced eight basis points to 4.41%
Commodities
- West Texas Intermediate crude rose 1.4% to $84.64 a barrel
- Gold futures were little changed
- This story was produced with the assistance of Bloomberg Automation.
This story was produced with the assistance of Bloomberg Automation.
