Last week’s CPI inflation report buoyed both bond and stock markets causing mid- and longer-term Treasury rates to fall and stock prices to achieve their three-week straight rally, with the S&P 500 closing the week up 2.44% and up 18% so far this year.
- October CPI fell more than expected with no headline monthly inflation in October driven mostly by a 5%, one-month drop in gasoline prices. 12-month headline inflation fell to 3.2% in October from 3.7% the prior month.
- The Producer Price Index for final demand goods and services also fell 0.5 percent in October, which is a good sign for future CPI inflation. This decline is the largest decrease since April 2020 and is attributable mainly to a decline in food and energy prices.
- Futures markets are now expecting no additional Fed rate hikes this year, with the Fed’s next interest rate action to be a ¼% rate cut in Q2 of 2024 with a similar rate cut in every quarter thereafter in 2024, providing a cumulate rate drop of one percent in 2024. With this Fed funds rates should be back to 4.4% by December 2024 and to 4% in early 2025.
- Control group retail sales values increased by only 0.2% m/m in October following a 0.7% m/m increase the month before. The good news is that after 4% consumer spending growth in the second quarter, consumer spending is slowing, but showing no signs of collapsing, despite the resumption of student loan payments, slowing employment growth and the $2.9 trillion pandemic-era excess savings now mostly all spent.
- If the economy slows more quickly that many expect in the first half of 2024, with inflation falling faster than forecast and unemployment rising above 4%, then we would expect the Fed to cut interest rates more aggressively bringing them down two percentage points and closer to 3% to 3.5% which would be 1% to 1-1/2% above the rate of inflation.
- The Leading Economic Indicators index is updating later this morning (November 20) and is expected to be down a further 0.8%. The Treasury yield curve is still inverted. Both are signs of impending recession, so we remain cautious as we proceed through an otherwise positive environment for financial markets.
Last Wednesday’s meetings between China President Xi and U.S. President Biden and U.S. business leaders in San Francisco seem to have gone well. While neither side changed any basic policy positions – except the San Diego Zoo may be getting pandas — the tone shifted from confrontation towards competition and consultation.
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