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Last Updated: 13-Dec-22 09:05 ET | Archive
November CPI cools and markets heat up in a big way
You know you are in a whole new dimension when market participants get excited by the idea that consumer inflation is up "only" 7.3% year-over-year. That seemed to be the perspective reigning in the equity futures market ahead of the release of the November Consumer Price Index (CPI).
Prior to the release of that report at 8:30 a.m. ET, the S&P 500 futures were up 24 points and were trading 0.6% above fair value. The 10-yr note yield was down three basis points to 3.58%.
We could calibrate the market's excitement about a possible 7.3% inflation rate ahead of the release, because that was the consensus estimate and it stood in lower contrast to the 7.7% year-over-year rate for October.
To be fair, it was also helping the futures market some that Oracle (ORCL) was up 3.0% following its earnings report, that Boeing (BA) was up 1.9% after United Airlines (UAL) made the largest aircraft order ever, and that Moderna (MRNA) and Merck (MRK) were up 8.8% and 2.5%, respectively, after their melanoma vaccine candidate met a Phase 2 primary endpoint.
The main thrust for the futures market, however, was the hopeful anticipation that the CPI report would show continued disinflation. That hope was met... sort of.
From a headline standpoint, things checked in even better than expected. Total CPI was up 0.1% month-over-month (Briefing.com consensus +0.3%) and core-CPI, which excludes food and energy, was up 0.2% month-over-month (Briefing.com consensus +0.3%).
On a year-over-year basis, total CPI was up "only" 7.1%, versus 7.7% in October, and core-CPI was up "only" 6.0%, versus 6.3% in October.
The key takeaway from the report at first blush is that overall inflation is cooling and that the Fed should be convinced to temper the pace of its rate hikes and perhaps place a lower ceiling on its terminal rate.
We can calibrate the market's excitement about this possibility by looking at the initial response in the futures market, the Treasury market, the U.S. Dollar Index, and the fed funds futures market.
In the wake of the CPI report, the S&P 500 futures are up 116 points and are trading 2.9% above fair value, the Nasdaq 100 futures are up 452 points and are trading 3.9% above fair value, and the Dow Jones Industrial Average futures are up 765 points and are trading 2.2% above fair value.
The 2-yr note yield is down 19 basis points to 4.20% and the 10-yr note yield is down 15 basis points to 3.46%. The U.S. Dollar Index is down 1.0% to 104.04. The fed funds futures market, meanwhile, now sees only a 38.6% probability of a 5.00-5.25% terminal rate by mid-2023 versus 61.7% yesterday, according to the CME FedWatch Tool.
It is going to be a big open for the stock market alright.
There is a second key takeaway from the CPI report, however.
Services inflation did not improve at all. It held steady at 7.2% year-over-year. Excluding medical care services, services inflation actually increased to 7.6% year-over-year, versus 7.5% in October. Excluding rent of shelter, there was some improvement to 7.3% from 7.5% in October.
Those elevated readings may not be as convincing to the Fed as they are to market participants, so today's outsized response to what has been deemed by the market to be a very encouraging inflation report could get reined in on Wednesday if Fed Chair Powell happens to draw more attention to services inflation as a basis to emphasize that the Fed still has a lot of work to do to get inflation back down to the 2% target.
For the moment, though, the stock market is wrapped up in the main headlines and the burgeoning thought that there could be clearance now to unleash a year-end rally.
-- Patrick J. O'Hare, Briefing.com
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