Financial markets cling to hopes inflation will ease ahead of October CPI data

As the next major U.S. inflation report is set to land on Thursday, traders and investors continued to cling to hope that the data will contain enough signs of easing pressures. on prices to help push forward the Federal Reserve’s rate hike in December.

Economists and traders expect Thursday’s Consumer Price Index report for October to produce the first annual headline below 8% in the past eight months. In addition, fed funds futures reflected a 57% chance on Wednesday that policymakers would undo their series of giant 75 basis point rate hikes and hike by half a percentage point next month, even if there is still one more inflation report to consider after the October reading arrives.

Financial markets have plenty of material to analyze in Thursday’s CPI report. For one thing, October’s CPI is expected to include another strong monthly reading, 0.6% from September’s 0.4%, according to forecasts by economists polled by The Wall Street Journal. On the other hand, the core monthly reading, which excludes food and energy to provide a less volatile inflation reading, is seen as falling to 0.5% from 0.6% previously. The eye-catching headline annual rate, which may impact household expectations, is also seen as slipping to 7.9% in October from 8.2% in September.

“We’re hoping for the best, but preparing for the worst as the data continued to surprise,” said Brian Jacobsen, senior investment strategist at Charlotte, North Carolina-based Allspring Global Investments, which manages $463 billion. . “We expect durable goods prices to stabilize or even fall, but we don’t know what to expect from the services numbers. There’s such a range of possible outcomes that I don’t have much confidence in the forecasts.

Ahead of Thursday’s CPI report, Allspring was heading towards consumer staples and energy stocks rather than the broader S&P 500 SPX index,
+0.92%,
and has been overweight U.S. stocks relative to those in Europe, while considering taking positions in real estate investment trusts, Jacobsen said by phone.

Meanwhile, traders in derivatives known as fixings expect the headline annual CPI rate for October to come in at 7.9%, matching the median forecast by economists. . From here, fixation traders, who have primarily focused on the potential for upside inflation surprises over the past year, now see the headline annual rate slipping to near 7.4% and 7, 1%, respectively, for November and December, before dropping further to around 3% by July.

“Everyone is, again, looking for a pivot in the CPI,” said Gang Hu, a TIPS trader at New York-based hedge fund WinShore Capital Partners. “The market is looking for a reversal, this time with good reason, and expects the real estate and medical components of the report to turn around. The market is also looking ahead to see whether or not the economy will slow down at some point. given, regardless of the CPI figure, which would solve the inflation problem.

Unless Thursday’s CPI contains a major upside or downside surprise that drives stocks and bonds to sell off or rally, financial markets could be heading for a relatively quieter period compared to the start of the month. this year due to the Fed’s post-meeting guidance last week, which gave investors more clarity on the likely path of interest rates, Hu said. He said that while October inflation data is in line with expectations, stocks are more likely to be influenced going forward by weaker-than-expected corporate earnings or possible fallout from the recent crypto turmoil. .

Thursday’s data is also unlikely to make much of a difference to current market thinking about where the Fed will eventually raise the fed funds rate target in the first half of next year, which is mostly seen as between 5% and 5.25%, according to trader WinShore Capital. That should leave 10- and 30-year Treasury yields trading in recent ranges, he said.

On Wednesday, US stocks DJIA,
+0.10%

SPX,
+0.92%
ended sharply lower after three straight days of gains. Treasury yields were mixed, with the 10-year rate TMUBMUSD10Y,
3.819%
closing the New York session at 4.15%.