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Food and shelter prices rise, while the energy index falls as gasoline prices plunge
The consumer price index (CPI) for all urban consumers (CPI-U), which measures a broad basket of goods and services, was flat last month after rising 0.4% in September, the Labor Department’s Bureau of Labor Statistics (BLS) said on Tuesday. In the 12 months to October, consumer prices rose 3.2%, down from 3.7% the previous month. Economists surveyed by Dow Jones expected the headline CPI figure to increase by 0.1% on the month and 3.2% year-on-year. The shelter index surged at an annual pace of 6.7% in October, accounting for over 70% of the total increase in all items, excluding the food and energy index.
Meanwhile, core inflation, which excludes the volatile food and energy prices, slipped from 0.4% in September to 0.2% last month and from 4.1% to 4.0% over 12 months. The annual core inflation rate fell to the lowest in two years in October but is still above the Federal Reserve’s 2% inflation target.
CPI- seasonally adjusted month-on-month percent change
Source: Bureau of Labor Statistics (BLS)
In recent days, Fed policymakers have been slightly dovish on monetary policy. However, they have pushed back against market predictions that the central bank is done raising interest rates this cycle. However, Tuesday’s consumer price index report has more or less established that another rate hike is unlikely, at least in December, given the soft CPI report.
The confirmation also comes from derivatives traders who cut their rate hike odds in December following a weaker-than-expected October CPI reading. According to the CME’s FedWatch Tool, traders now see a 94.8% probability that the Federal Reserve will maintain interest rates in the 5.25%-5.50% range next month, up from 85.5% a day earlier and 69.6% a month back. Traders also predict the US central bank will begin cutting rates next year, with the first cut expected in May 2024.
Key highlights of the October consumer price index report
The seasonally adjusted consumer price index was unchanged in October, with the index for shelter continuing to climb, and despite being offset by a decline in the gasoline index, it was the primary reason for the inflation rate holding flat month-on-month. The cost of shelter is one of the biggest expenses for many families, rose 0.3% in October, down from 0.6% in September, while rents surged 0.5% on the month and 7.2% annually.
The energy index fell 2.5% month-on-month amid a 5.0% plunge in the gasoline index, which more than offset increases in other energy-related indexes. Meanwhile, the food index surged 0.3%, up from 0.2% in September.
The index for all items less food and energy rose by a smaller 0.2% in October after registering a 0.3% increase in September. However, the shelter index was the biggest contributor to the month-on-month increase in the index for all items, excluding food and energy. The other contributors to a lower CPI reading in October were the index for new vehicles, which dropped 0.1%; used cars and trucks, which fell 0.8%; and the communication index, which slid 0.3% on the month.
Economists and market experts’ reaction to the US CPI report
Paul McCulley, professor at Georgetown University and a former economist at Pimco, said on CNBC’s Squawk Box that the October consumer price index report is a game changer. He trusts it’s a day of rational exuberance since the data showed a crack in the shelter element, which we’ve been waiting for long.
Robert Frick, the corporate economist at Navy Federal Credit Union, believes the CPI data is good news both in terms of the long-term inflation fight and easing short-term pain. He, however, thinks the October inflation report is just one victory in a long war against inflation.
Mathew Miskin, the co-chief investment strategist at John Hancock Investment Management, believes cooling inflation and a slowdown in the labor market will compel the Fed to hold rates at current levels. He thinks another rate hike is less likely, especially after the weak October inflation data.
Market reaction to the US CPI report
The US equities markets rallied on Tuesday, with the key benchmarks surging between 1.45%-2.15% to register one of the biggest daily gains recently, as the October CPI reading more or less cemented market expectations that the Federal Reserve might be done raising interest rates this cycle.
The Dow Jones Industrial Average rose 1.43% to 34,827.70, registering the highest close in two months. Meanwhile, the S&P 500 jumped 1.91% on the day to settle 4,495.70, the most since September 14th, while the Nasdaq 100 jumped 2.13% to end Tuesday’s session at 15,812.47, recording the highest daily settlement since July 19th.
According to Dow Jones market data, 50 companies in the S&P 500, representing a tenth of the index, recorded their best performance year-to-date in terms of percentage change on Tuesday. Also, tech shares soared after the announcement of the US CPI data, with the combined market cap of the top technology giants, also called the magnificent seven, jumping by $207.5 billion on Tuesday.
In the US treasury markets, government bonds rallied across the board after the October consumer price index report came in below Street estimates, lowering expectations of future rate interest hikes by the Federal Reserve. The yield on the rate-sensitive 2-year note tumbled 19.9 basis points to 4.838%, the yield on the benchmark 10-year note fell 19.1 basis points to 4.451%, and the 30-year bond yield slid 13.6 basis points to 4.622%.
The sharp drop in the bond yields drove mortgage rates lower, with the average rate of the 30-year mortgage falling 18 basis points to 7.4% on Tuesday from more than two-decade highs of over 8% less than a month back.
Lawrence Yun, the chief economist of the National Association of Realtors (NAR), is confident that the rate hikes in the US are over, and it’s time for Fed policymakers to start considering interest rate cuts. He believes the bond market reaction indicates that interest rates will be lowered next year and anticipates mortgage rates to dip to 7% over the next few months before sliding to the 6% range by spring 2024.
In the forex markets, the US dollar tumbled against its rivals on Tuesday after the US CPI report showed prices paid by consumers were unchanged in October. The dollar index, a gauge of the US currency against a basket of six others, fell 1.49% to end Tuesday’s session at 104.05. The greenback fell 1.68% versus the euro to 1.0878, 1.79% against the pound sterling to 1.2498, and 0.89% to the yen to close at 150.37 on Tuesday.
Meanwhile, the yen remained volatile against its peers amid fears that Japanese authorities will likely intervene in the forex markets to boost the currency and from a flurry of trading activity in options. They last intervened in September-October 2022, the first since 1998.
Technical View
Netflix Inc (NFLX)
Netflix reversed some early gains to settle at $448.65 on Tuesday, up 0.91% for the session. The stock has been in a solid bull run since the second half of October after hitting multi-month lows of $344.73 on October 18th. On Tuesday, Netflix tested key resistance and the September highs of $453.45 before pulling back slightly. A close above this level could drive prices near the July highs of $485 and further toward the long-term resistance at $530.00-535.00. On the downside, near-term support is $431.00, which could make good entry levels.
Buy Netflix shares if prices close above $455.00 or break $465.00 with a stop loss at $445.00 for a profit target of $530.00. Further, buy positions can also be initiated if prices slide toward $431.00, with a stop loss at $423.00, and exit as prices approach $450.00
Netflix- Daily chart
EURUSD
The euro rallied 1.68% against the US dollar to end Tuesday’s session at 1.0878, registering the highest close since August 30th. Europe’s single currency was one of the biggest beneficiaries in the dollar selloff following a weak US CPI report on Tuesday, with the gains likely to extend into today’s session. EURUSD is in a primary downtrend, but in the near term, the pair will likely oscillate in the 1.0650-1.0950 band, and the short-term strategy will be to trade the range.
Create long euro positions at 1.0650-1.0660 with a stop loss at 1.0610 for a profit target of 1.0900-1.0950. However, if the pair first tests the top end of the band, initiate short positions at 1.0950, with a stop at 1.1000 for a profit target of 1.0700.
EURUSD- Daily chart
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