Inflation data raises doubts over Fed ‘staying on course’: Morning Brief

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Friday, November 11, 2022

Through today’s newsletter Jared Bligrey, a reporter focused on Yahoo Finance markets. Follow him on Twitter @SPYJared. Read this and more market news on the go Yahoo Finance app.

Stocks and bonds had a particularly positive reaction New data has emerged Jupiter showed that inflation continued to moderate after hitting a 40-year high in the summer.

Dow (^ DJI), Nasdaq (^IXIC), the S&P 500 (^ GSPC) and Russell 2000 (^RUT) each had their best day since the 2020 pandemic subsided. 5- and 10-year Treasury notes (^ FVX, ^tnx) saw their biggest one-day yield drop since Fed Chairman Ben Bernanke ramped up quantitative easing in March 2009.

A casual observer could be forgiven for thinking the central bank had beaten inflation. Although the U.S. remains far from its 2% inflation target, inflation fell more than expected last month. The consumer price index rose 0.4% in October, ahead of expectations for a 0.6% gain, while the year-over-year measure fell to 7.7% from 7.9%. Excluding food and energy, core inflation rose in October but was less than expected.

Federal Reserve Board Chairman Jerome Powell held a news conference following the Federal Open Market Committee meeting on interest rate policy in Washington after Powell announced that the Federal Reserve has raised interest rates by three quarters of a percentage point as part of their continued efforts to combat inflation. US, November 2, 2022. REUTERS/Elizabeth Frantz

Will it be enough for Fed Chair Jay Powell? “Powell Pivot” could be heard echoing across the Twitterverse as stocks soared in every sector and industry. Although inflation remained stubbornly high, better-than-expected CPI prints prompted some investors to take risks again.

Optimism throughout 2022 has fueled such outward market moves. So far, market participants have misjudged, as fresh lows in major indices have followed every major rally.

Powell, for his part, has promised to raise interest rates, even if it hurts parts of the economy. In his last press conference, Powell flat-out said he was more concerned about “entrenched” inflation than the risks of the Fed continuing on its worst path – the main risk being recession.

That decision didn’t stop investors from hoping the central bank would soon halt rate hikes.

Alfonso “Alf” Peccatiello, founder and CEO of The Macro Compass, told Yahoo Finance on Thursday that bonds are pricing in a lower terminal Fed funds rate — or the rate at which the central bank stops hiking. He also highlighted that bond volatility is “dropping like a stone” and credit spreads have tightened. This incentivizes all investors to take more risk, at least in the short term.

“With this inflationary print,” Peccatiello said, “investors believe the Fed will be less and less certain.”

What to watch today

economy

  • 10:00 am ET: University of Michigan Consumer SentimentNovember primary (59.5 expected, 59.9 previous month)

  • 10:00 am ET: Michigan U. Current conditionsNovember primary (62.8 expected, 65.6 in previous month)

  • 10:00 am ET: U of Mich expectationsNovember primary (55.5 expected, 56.2 previous month)

  • 10:00 am ET: Mich. 1 year inflationNovember primary (5.1% expected, 5.0% in previous month)

  • 10:00 am ET: Mich. 5-10 year inflationNovember primary (2.9% expected, 2.9% in previous month)

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