Consumer price index data for October showed that progress lowering core inflation appears to have temporarily stalled, but odds for a Federal Reserve rate cut in December improved on the in-line figures.
The S&P 500 opened slightly higher on Wednesday, but tilted lower soon. Treasury yields fell but were off lows as investors gauged the implications for Fed policy and the Trump election rally.
10:06 a.m. ET
Stocks, Yields Fall
The S&P 500 fell 0.1% Wednesday morning, with the Dow Jones off a fraction and the Nasdaq down 0.3%. The Russell 200 climbed 0.25%, well off highs.
The 10-year Treasury yield is at 4.41%, below Tuesday's 4.43% but off premarket lows.
The odds of a December Fed rate cut are at 82.3%.
9:35 a.m. ET
Wall Street Reacts To CPI
""Bang in-line core inflation leaves the Fed on track to cut rates in December," wrote Lindsay Rosner, fixed income strategist at Goldman Sachs Asset Management. "Today's number cools fears of an imminent slowdown in the pace of rate cuts. Still, with uncertainty over fiscal and trade policies high, there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in."
Seema Shah, chief global strategist at Principal Asset Management, agreed that "a December cut is still in the cards," after markets were bracing for an upside inflation surprise. She expects the Fed will slow its pace to cutting every other meeting "come early 2025."
Pending more complete data from tomorrow's PPI, Pantheon Macroeconomics chief U.S. economist Samuel Tombs predicted that the Fed's primary inflation rate, the core PCE price index, will rise 0.26% in October. That would lift the 12-month core inflation rate to 2.8%, which means the Fed projection of 2.6% core inflation in Q4 may prove too low. Pantheon still expects a quarter-point rate cut in December, followed by a January pause.
9:34 a.m. ET
CPI Inflation Market Reaction
The S&P 500 edged up 0.1% in early Wednesday stock market action, reversing a slim decline before the CPI data. The Dow Jones and Nasdaq also rose slightly. The Russell 2000 popped 0.6% after the small-cap index tumbled 1.8% on Tuesday.
The 10-year Treasury yield has fallen to 4.37% from 4.43%.
The odds of a Fed rate cut in December have picked up to 82%.
8:59 a.m. ET
Did Core CPI Beat By A Whisker?
Rounded out to hundredths, instead of tenths, the core CPI rose 0.28% from September, according to the St. Louis Fed.
That puts the 12-month core CPI inflation rate at 3.33%, up from 3.31% a month ago.
8:51 a.m. ET
Auto Insurance Rates Dip
Motor vehicle insurance prices dipped 0.1% on the month, while still rising 14% from a year ago. However, the PCE price index uses a measure drawn from the PPI, which will be another key item to watch in tomorrow's report.
8:48 a.m. ET
Housing Inflation
Primary rents rose a moderate 0.3%, but the more important owner's equivalent rent measure rose 0.4% on the month. Hotel and motel prices rose 0.5%, less than some expected given that major hurricanes can create a demand surge and push up room prices.
Housing costs, which have outpaced core inflation as a whole, account for 43% of the core CPI basket but less than 18% of core PCE outlays.
8:46 a.m. ET
CPI Inflation Vs. PCE
Airline fares rose 3.2% on the month, contributing to a 0.4% increase in overall transportation service prices.
The Fed's primary inflation rate, the core PCE price index, uses a different measure of the cost of air passenger miles on select routes. That will be reported with tomorrow's producer price index.
The CPI measure of medical care services prices also rose 0.4%. The core PCE price index uses a much broader measure that also will be reported with the PPI.
CPI data provides about 70% of PCE price index components. The rest mainly comes from the producer price index, including prices for health care. PPI data out at 8:30 a.m. Thursday will allow economists to sharpen their estimates for October's core PCE price index, which will be released on Nov. 27.
8:38 a.m. ET
Food And Energy Prices
Energy prices were unchanged on the month and down 4.9% from a year ago.
Food prices rose 0.2% from September and 2.1% from a year ago. Prices for food away from home rose a modest 0.2%. That's decent news for the Fed's key inflation rate since food services are included in the core PCE price index.
8:36 a.m. ET
Core Goods And Services Prices
Core goods prices were flat on the month, after September's 0.2% increase, which was the first increase in a while. Goods prices are down 1% from a year ago.
Core services prices rose a moderate 0.3% on the month, after back-to-back 0.4% gains. Nonenergy services prices are up 4.8% from a year ago.
8:33 a.m. ET
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.2% on the month, matching the Econoday consensus forecast. The 12-month CPI inflation rate ticked up to 2.6% from 2.4%, in line with estimates.
The core CPI, which strips out volatile food and energy prices, rose 0.3% vs. September levels, as expected. The 12-month core CPI inflation rate held at 3.3%, also as expected.
The core CPI inflation rate, which peaked at a 40-year-high 6.6% in September 2022, has stalled since falling to 3.2% this past July.
Below is an excerpted preview of the October CPI inflation report and the possible implications.
The stock market and the Fed have plenty of reason to take the CPI inflation data in stride. Most importantly, Fed Chairman Jerome Powell made a convincing case last week as to why inflation is on a clear track to fall to 2%, and he fully expects some bumps along the way.
Fed Rate Cut Outlook
Ahead of the CPI data, markets are pricing in 59% odds of a quarter-point rate cut at the Dec. 18 Fed meeting, according to CME Group's FedWatch page. That's down from 77% a week ago, just ahead of the 2024 election results.
Currently markets expect 75 basis point in rate cuts by the end of 2025. That would lower the Fed's target range to 3.75% to 4% from today's 4.5% to 4.75%.
However, that's two fewer quarter-point cuts than the Fed expected as recently as Sept. 18. Fed projections released that day penciled in a federal funds rate of 3.25% to 3.5% at the end of 2025.
Powell said last week that the Fed wouldn't quickly adjust its monetary setting due to election results. President-elect Donald Trump has yet to spell out concrete fiscal and trade policies, and Congress will need time to approve much of that. However, financial conditions, which include the level of the S&P 500, can influence the Fed interest-rate outlook.
Still, Powell said last week that nonhousing services and goods inflation is back to 2%. On top of that, he noted that newly signed leases for rental housing "are experiencing very low inflation." Eventually, that will spread to older leases as well, he said. Finally, Powell said that the labor market is "not a source of inflationary pressures."
With conviction that inflation is heading to 2% and the Fed's current policy setting still depressing growth, more rate cuts are in store, though the pace of cuts is in question.
Before the Fed's next decision day on Dec. 18, we'll get the jobs report and CPI for November, as well as the October PCE price index. Unless the next jobs report reverses the weakness seen in October data, the Fed may opt to cut again in December to keep from getting behind the curve.
S&P 500
The S&P 500 slipped 0.2% in Tuesday stock market action. That followed winning streak that rang up a 5% gain, the best five-day advance in a year.
Also on Tuesday, the 10-year Treasury yield powered up 12 basis points from Friday's close to 4.43%, near a four-month high.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
