Last week’s Consumer Price Index (CPI) data for October showed prices surged 6.2% year over year, the most in more than 30 years. On a monthly basis, CPI jumped 0.9% versus the 0.6% growth expected among surveyed economists. The inflation report showed a broadening of inflationary pressures in shelter costs, energy prices, and vehicles, complicating the Federal Reserve’s (Fed) task of supporting the recovery while keeping price growth in check.
In the wake of the report, U.S. Treasury yields moved higher, particularly in the front end of the curve where traders are speculating the Fed will have to hike interest rates sooner than it currently projects. As of this morning, futures trading is pricing in more than two 0.25% rate hikes by the end of 2022. The disconnect between the market’s increasingly hawkish expectations for Fed policy and the Fed’s dovish forward guidance are fueling the highest rate volatility readings in 19 months. We think the Fed will ultimately approach rate hikes with caution, with cooler inflation in 2022 providing the central bank some relief.
U.S. equity markets were largely able to shrug off last week’s inflation concerns –which also took a big bite out of the University of Michigan Consumer Sentiment Index –and instead focus on the positives. Third quarter corporate earnings continue to provide a major source of optimism. With 92% reporting, more than 80% of the S&P 500’s constituents have posted positive earnings surprises. 68% exceeded analysts’ sales expectations. This week, earnings season will wind down with major U.S. retailers reporting. That may help shed some light on consumer spending behavior ahead of the holiday shopping season and provide a glimpse into how companies are navigating margin pressures from rising prices.
A look back
- The S&P 500 declined 0.3% last week, lagging the MSCI ACWI’s flat performance.10-year U.S. Treasury yields jumped 0.11% to 1.56%.
- October’s CPI data climbed 6.2% year over year, far exceeding expectations and touching a three-decade high. Durable inflation prints continue to challenge the Fed’s transitory narrative.
- The University of Michigan Consumer Sentiment Index fell to 66.8, a 10-year low. Consumer confidence is being dented by high inflation, with 1 in 4 survey respondents reporting a reduction in living standards.
A look ahead
- President Biden will meet virtually with Chinese President Xi Jinping to discuss trade, human rights, and recent military tensions. Market participants will monitor the summit for signs of a warmer diplomatic relationship.
- A number of Fed officials will make public appearances around the U.S. as policymakers await President Biden’s Fed Chair nomination.
- Economic releases: Empire Manufacturing, Retail Sales, Housing Starts, MBA Mortgage Applications, the Leading Index, and Initial Jobless Claims.
To read the publication in its entirety, including charts and support, please select the "Download PDF" button, below.