US CPI: a Fed pivot is now on the cards
US CPI data for October came in below expectations and the market likes it. The S&P 500 and the Nasdaq are up 3.8% and 5.1% respectively at the time of writing. Added to this, even Bitcoin is higher by 10% on Thursday, as the October inflation print changes the mood music for markets.
October’s CPI prints were as follows: headline price growth fell to 7.7% YoY, down from 8.2% in September and lower than the 8% expected. This is the lowest reading since January. Core prices rose by 6.3%, lower than the 6.6% recorded for September. At this stage of the economic cycle, the real numbers to watch are the monthly increases in prices. MoM headline CPI was 04%, core CPI expanded at a 0.3% monthly rate. While inflation is still growing, this is a notable slow down, and while there is still another monthly inflation print to come before the next Federal Reserve meeting, this opens the door to the Federal Reserve slowing down its pace of rate hikes. As ever, the devil is in the detail, below we will dive into the numbers and let you know the key takeaways from October’s CPI report:
- Headline CPI saw a large decline in the pace of food price growth both at home and outside the home.
- Gasoline and energy prices rose sharply, gasoline prices were up 4% last month, and fuel oil up a whopping 19.2%.
- If you strip out shelter costs, new cars, transportation services and services less energy costs, then monthly core CPI would be negative at -1.6% MoM, which opens the door to a slowdown in rate hikes even more than what is currently priced in by the market.
The fact that core CPI would be negative month on month if it wasn’t primarily for shelter costs and transportation services costs, suggests that US inflation has peaked and is now on a downward trajectory.
Shelter costs and housing costs tend to lag rate increases, this means that it takes some time for rate rises to weigh on house prices and drag shelter costs lower. We expect house prices to decline sharply in 2023, as the large increase in US mortgage rates to above 7% weighs on housing demand. Likewise, transportation services are likely to see prices rise when the price of fuel rises, so the Federal Reserve would be justified in looking through the increase in transportation service costs when they next meet in December.
This decline in price growth has taken the market by surprise and opens the way for a sharp rally in risk sentiment. We expect this to be a global stock market rally, since the Federal Reserve is essentially the central banker to the world right now. This is good news for EM, for credit and for global risk sentiment generally. It is also extremely bad news for the USD, and the peak in US inflation could also mark the peak in the buck. Overall, we will still need to see more progress in lowering inflation in the November and December CPI reports, but the main message from the October report is that inflation is coming down and it could fall faster than currently expected.