Two hotter-than-expected inflation reports this week haven't shifted the outlook for Federal Reserve rate cuts. Yet investors looked past consumer price index and producer price index data that both showed the core inflation rate unexpectedly rose last month, much like their muted reaction to September's surprisingly strong jobs report. The S&P 500 rallied to a new record high in Friday morning stock market action.
Wall Street is betting that it's too soon for the Fed to rethink its three-week-old rate-cutting cycle after just a few contrary data points. That's partly because rates have a long way to come down and partly because hurricanes, the Boeing strike and possibly the coming election have already begun to muddle economic reports. Thursday's spike in initial jobless claims was just the beginning, and the skies won't clear before the next Fed meeting on Nov. 7.
CPI Inflation
The overall consumer price index unexpectedly rose 0.2% on the month vs. +0.1% forecasts. The 12-month CPI inflation rate fell to 2.4% from 2.5% in August, but overshot 2.3% forecasts.
The core CPI, which strips out volatile food and energy prices, rose 0.3% vs. August levels, in line with 0.3% forecasts. However, the 12-month core CPI inflation rate unexpectedly rose to 3.3%, above steady 3.2% expectations. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Core goods prices rose 0.2% on the month, ending a string of of monthly declines. Prices for new vehicles rose 0.2% from August, but were still down 1.3% from a year ago. Prices of used cars and trucks rose 0.3% on the month, but fell 5.1% on the year.
Core services prices rose 0.4%, even as shelter prices rose just 0.2%. That's because transportation services prices rose 1.4% and medical care services 0.7%.
Owner's equivalent rent, which makes up just over one-fourth of the CPI's weighting, rose 0.3%. Hotel and motel prices fell 2.3% on the month, holding down the overall increase in shelter prices.
In health care, physicians' services prices rose 0.9%, the largest increase since February 2021, while hospital prices rose 0.3%.
Airfares rose 3.2%. Recreation services prices fell 0.5%, despite a 10.9% monthly jump in admission prices to sporting events, which was the largest on record.
PPI Inflation
The producer price index for final demand was unchanged in September, undercutting forecasts of a 0.2% rise. However, upward revisions to past data boosted the 12-month headline PPI inflation rate to 1.8% from 1.6%.
The core PPI rose 0.2%, as expected. But revisions helped boost the core PPI inflation rate to 2.8% from 2.4%.
The Fed's primary inflation rate, the core PCE price index, gets about 30% of its inputs from the PPI and 70% from the CPI, based on weightings.
PCE health care services prices come from the PPI, which includes prices paid by third parties, not just out-of-pocket payments like the CPI. After upward revisions, PPI data showed health care services prices up 3.3% from a year ago, up from August's initially reported 2.9% 12-month increase.
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Initial Jobless Claims
Initial claims for jobless benefits unexpectedly spiked by 33,000 to 258,000 in the week through Oct. 5.
The data don't suggest that the Boeing strike was a huge mover, with claims up 1,744 in Washington state. However, claims jumped by 8,534 in North Carolina and 3,842 in Florida, likely impacted by Hurricane Helene.
Initial jobless claims jumped by 9,490 in Michigan, 4,484 in California and 4,328 in Ohio, unadjusted for seasonal factors.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, wrote that unadjusted claims rose by 19,000 in Washington state and the six states hardest hit by Helene.
Keep in mind that claims would have been expected to rise by about 20,000 on a seasonally unadjusted basis. That explains why initial claims rose by 53,750 on a seasonally unadjusted basis, but 33,000 on a seasonally adjusted basis.
Furloughs by Boeing and its suppliers in other states may have contributed to the unexpected jump in claims. Pantheon's Allen also notes that residents of hurricane-hit states may have temporarily relocated to other states and filed claims there.
The bottom line, Allen writes, is that the rise in claims probably doesn't signal a "sudden underlying deterioration" in the labor market. Still, the effects of Milton could push jobless claims to 300,000 within the next couple of weeks.
Fed Rate-Cut Outlook
After this week's batch of inflation data, markets are still pricing in 86% odds of a 25-basis-point rate cut on Nov. 7, according to CME Group's FedWatch page.
That's despite comments from Atlanta Fed President Raphael Bostic on Thursday, saying he would be open to a rate-cut pause in November. However, Bostic has been on the hawkish side this year, and it's not clear that other policymakers are wavering.
Odds that the Fed will cut a total of 50 basis points at the year's final two meetings initially stand at 81%.
Last Friday's surprisingly strong September jobs report had already closed the door to further rapid Fed easing, like September's half-point rate cut. Policymakers still think there's plenty of room to cut, with the federal funds rate well into restrictive territory. However, rate cuts beyond the move on Nov. 7 will be data-dependent.
S&P 500
The S&P 500 rose 0.6% in Friday stock market action, clearing 5,800 for the first time. The S&P 500 dipped 0.2% after Thursday's CPI, a day after notching its 44th record closing high of the year. Through Thursday, the S&P 500 is up 21% year to date.
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.
