Better inflation data sparks rally in Russell 2000 and Nasdaq

Today’s consumer price data set the early tone on Wall Street, confirming traders' opinion that we are heading down the path needed for a Fed pivot next year. Bonds saw their most robust rally this year, with the benchmark 10-year yield falling fifteen basis points to 4.46%. Stocks rallied, led by a 4.4% rise in the Russell 2000 and 2.4% in the Nasdaq. The dollar sold off across the board, with the dollar index down 1.4%.

TODAY’S MAJOR NEWS

Consumer Price Index (CPI) inflation slows, markets rally

Price rises showed signs of slowing in October, but annual core inflation – the Fed’s target – was still up 4%. Nonetheless, this was unexpected: only eight of 65 economists forecast this inflation result. Chicago Federal Reserve President Austan Goolsbee heralded the inflation gains made without the usual economic downturn.  Goolsbee said that the most significant one-year drop in CPI inflation in the last century was a more than 4% drop from 1981 to 1982, and in 2023, "we may equal or even surpass (that). And we may do that with an unemployment rate that never gets above 4%."

Overall, inflation is still trending in the right direction. Still, the Federal Reserve will continue to sound hawkish until it feels that super core inflation, services minus shelter, is low enough for overall inflation to approach its 2% mandate. This inflation outturn probably doesn’t mean that the Fed must go any higher with its rates, particularly with other economic factors doing its work. Market rates concur. Fed fund futures put a zero percent chance of a rate hike at its December meeting and just 6% odds for an increase in January. Interest rate swap rates see the Fed cutting rates as early as June next year, with one percent basis points cut by the end of 2024.

• Headline inflation was up 3.2% year-on-year in October, less than 3.3% expected, and down from 3.7% last month
• Energy prices fell 2.5% month-on-month in October and were down 4.5% year-on-year, contributing to the positive headline inflation reading
• Food prices rose 0.3% month-on-month, up 3.3% year-on-year.
• Core CPI rose 4.0% year-on-year in October, down from analyst expectations that it would remain unchanged from September’s 4.1%
• Headline CPI inflation was flat in October versus the previous month, better than the 0.1% forecast and down from 0.4% gains last month
• Core inflation, ex volatile food and energy, rose just 0.2% month-on-month in October, less than 0.3% expected

Investors expect bond yields to fall

Investors have never been this confident bond yields are headed lower, according to Bank of America’s survey of institutional investors. BofA's monthly fund managers survey reports that 80% of respondents see bond yields falling in 2024, the most significant margin ever seen. It’s interesting to hear this viewpoint on a day when bond yields rallied, taking 10-year yields under 4.5%.

Commenting, strategist Michael Hartnett wrote: "The big change (in November) was not the macro outlook, but rather the conviction in lower inflation, rates, and yields.” If proven correct, this could boost equity prices as the discount rate falls –notably, as we’ve seen recently, tech and bank stocks.

Oil rallies on expected supply shortfall

OPEC argued that the oil price outlook is positive “despite exaggerated negative sentiments” in the oil market. Even as the group insists that crude demand is strong, Saudi Arabia keeps its output at the lowest level in years. However, the IEA said that global oil markets won’t be as tight as expected this quarter, as supply upgrades are outpacing upward revisions to demand.  The IEA raised forecasts for world fuel consumption this year on surprising demand from China and anticipated a supply shortfall during the fourth quarter. All of this supports an oil price that recently dipped from a high of $94 per barrel to a low of $76 per barrel.

TODAY’S MAJOR MARKETS

Russell 2000 leads the rally

• The Russell 2000 rose 4.7% after the CPI result, with the Nasdaq up 2.4% and the S&P 500 up 2.0%
• Foreign equity markets were closed mainly and so did not catch the rally, with the Dax up 1.8%, the Nikkei 225 up 0.3% and the FTSE 100 up 0.2%
• The VIX, Wall Street’s fear index, was unchanged at 14.1 (the year’s low was 13.0)

Bonds yields rally strongly, dollar falls

• 2- and 10-year yields rallied strongly, to 4.83% and 4.46%, respectively
• The dollar index was down 1.4% at 104.2
• Versus the dollar, Sterling was up 1.8%, the Euro 1.7%, and the Yen 0.3%

Oil rallies

• Oil prices rose 0.3% to $78.5 per barrel
• Gold prices rose 0.8% to $1,966 per ounce, while Silver rose 3.5% to $23.2 per ounce
• Spot grain and oilseed prices also erased early losses to move higher
• Soybean prices continue to post modest losses, pulling back from yesterday's significant gains
• Corn and wheat post modest gains from chart-related short-covering

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]