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Breaking News: Indecisive Market Reaction to US CPI Beat

Indecisive Market Reaction to US CPI Beat
Breaking News: Indecisive Market Reaction to US CPI Beat
The annual inflation rate in the United States was down from a record high last month, though still firmly in the grip of the Fed. The CPI rose to 7.7%, the lowest level since January and well below economists’ expectations of 8%. The good news for Wall Street was that the figure was also slightly lower than April’s reading of 4.2%, indicating that a slowdown in price rises may be in store.

Inflation is the most important driver of the Federal Reserve’s aggressive rate hikes, and Powell has made it clear that he will not ease his rate hike path until the Fed is confident that inflation is moving back to its 2% target. Thursday’s CPI report may be a good start to that pause, but the data will also need to show that prices are starting to moderate in areas like food and housing.

A softer print for the headline rate could send investors into a buying frenzy, but that would be hard to achieve without a similar softness for the core numbers, according to JPMorgan analyst Mike Feroli. Should September’s core CPI decline to 8.1% from an expected 8.2%, he wrote, the S&P 500 is likely to see a 1% drop – its largest in three years.

This would be enough to push the 10-year Treasury yield down 25 basis points or so, which is a major negative for the dollar and would increase the chances of the Fed easing its tightening cycle ahead of the Fed’s next meeting. However, if the data was stronger than expected, that could spark the bond market to reprice, increasing the probability of another jumbo rate hike in December, JPMorgan analysts say.

The S&P 500 Index has fallen for every CPI release this year and the October data is due out tomorrow, with markets awaiting a report that could set the future course of monetary policy by assessing inflationary trends in areas like food and energy. The report will be closely watched by the Fed, which needs to be satisfied that inflation is easing sufficiently for it to take off the brakes and dial down its rate hikes, economist Luzzetti said in a research note.

But a big jump in energy costs could be too much to bear, even if overall price increases are slowing, because they have driven the Fed’s aggressive rate hiking cycle so far. For this reason, energy will be watched closely when the data comes out tomorrow, especially if oil retraces.

Despite the reversal in the headline number, the underlying inflation rate remains a concern because it includes higher-than-expected costs for shelter and food, which are contributing to the rising cost of living. Combined, those costs account for almost half of the annual inflation rate, and have been spiking faster than many other indicators of the economy’s overall trend.

The fact that the CPI’s broader inflation rate is still inching toward the Fed’s 2% target suggests that the Fed remains on track to raise interest rates at a pace of 75 basis points each quarter, which is more than the 66 basis points it raised in July, according to JPMorgan economists led by Feroli. So, regardless of this week’s data, the US stock market will remain vulnerable to a CPI beat and will be more sensitive to the direction of inflation than the average over the past decade.

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