Were the CPI Numbers Really That Good?

My market career started in dealing rooms, where “the figures” were always a big deal. Every release of economic data was awaited with bated breath, with an eerie period of silence followed by an outbreak of chaos as everyone reacted to even obscure reads on economic activity and conditions. These days, I try not to overreact to any single data point. I am not trading with an endpoint measured in seconds, so what matters is not any single read, but the trends they cumulatively represent. Even so, when this morning’s CPI numbers hit the wire, the word that came out of my mouth was “Wow!”

For a while now, even as Jay Powell and other FOMC members have warned us that there is more work to do in the battle against inflation and that they may have to continue hiking rates, the market has been working on the assumption that the recent pause in rate increases is, in fact, an end to them. At first glance, these numbers suggest that the market has it right.

The “wow” came from the fact that the Consumer Price Index (CPI) was flat in the month of October. That was only slightly better than the +0.1% that economists had forecast, but the psychological impact of prices remaining stable in a month for the first time in a long time was huge. The stock market reacted accordingly, with futures jumping on the figures and moving even higher to where the Dow opened around 350 points above yesterday’s close.

However, if you look past the headlines, the news wasn’t quite so great.

Traders are looking at that flat read on overall CPI with a bit of confirmation bias. As I said, they have been betting on the Fed halting rate hikes for a couple of weeks now, and this suggests that they will do just that. The problem, though, is that the FOMC doesn’t look at the month-on-month change in all consumer prices. They look at the longer-term trend in prices ex-food and energy, and the news there was not as sensational. The annual increase in the ex-food and energy, or core number, was still 4%. That is also slightly better than expected, but it is still double the Fed’s target 2% rate of increase.

In reality, this data release changed nothing. It confirmed what we already knew, that inflation was moderating but is still stuck at a level that the Fed regards as too high. It may be enough to ward off another rate hike this year, but it doesn’t guarantee, or even strongly suggest, that rate hikes are over, let alone offer hope of a cut early next year. If anything, they add strength to the assertion that we are looking at “higher for longer,” a scenario where interest rates at around 5% remain the norm for some time to come.

That isn’t necessarily bad news in the long-term. If that is the case and there is no rate cut on the horizon, it will mean that the economy has remained relatively strong as inflation slowly falls to a more manageable level and that a painful recession can be avoided. That is obviously a good thing, but it does mean that we are looking at a period of sluggish growth, and that scenario -- a softish landing but slow growth -- is what stock prices reflect around where they are. There are other factors that could lend support this month and next, but the CPI data, while it will have caused a cheer to erupt in many dealing rooms, doesn’t justify a strong, sustained rally and it looks likely that the market will stay in its recent range as we close out the year, rather than break significantly higher.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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