Capital markets perspective: Thankful

Capital markets perspective: Thankful

11.20.2023

The most recent consumer price index report was, at least by my reckoning, good, but not necessarily spike-the-ball-and-dive-head-first-into-the-stands great. Here are the details: A big drop in gasoline prices allowed headline inflation to come in flat, comfortably better than expectations for a +0.1% increase.  So-called “core CPI,” which eliminates categories like food and energy was also a notch better than expected, at +0.2% versus expectations of +0.3%.1  

Not bad. But markets must’ve seen something different in the numbers because stocks rallied pretty much across the board – including a 5.4% spike in small-caps that ranked as the best one-day return in about a year. U.S. treasuries rallied and yields nose-dived, too. By the close of business on Tuesday, market-implied chances of a rate increase at the December 13 meeting had entirely evaporated

So why the rally? Maybe markets are convinced they’re right about inflation and monetary policy. After all, it’s happened before: It wasn’t all that long ago when “inflation is transitory” was still the Fed’s official line, but markets began cranking key interest rates (like 30-year mortgages) higher a full six months before the Fed started its own tightening campaign. Maybe markets are right again this time as they essentially argue that the Fed will be in a position to begin cutting rates as soon as next spring, which could help explain Tuesday’s big rally.  

Call me crazy, but I just don’t think one-tenth-of-a-percent on either side of estimates necessarily justifies that kind of hubris. I’ll stop there and return to our seasonal theme: things to be thankful for

Here’s a list (some of which probably also contributed to last week’s surprising rally): 

  • I’m thankful that Wednesday’s producer price index release was also better than expected2 and that businesses that responded to last week’s business inflation expectations survey by the Atlanta Fed3 don’t seem to be as worried about inflation as consumers who answer the Univerty of Michigan's survey are. 

  • I’m thankful that retail giant Walmart pointed out that sales trends have decelerated in recent weeks, even as the discount chain continues to take wallet share from other retailers, and as retail sales across the economy continued to beat expectations.

  • I’m thankful that the jobs market is perhaps finally starting to soften, as evidenced by a notable upturn in last week’s weekly and continuing jobless claims data, which are still very low by historical standards but are finally showing signs of inflecting higher.5 

  • I’m thankful that Congress passed a shutdown-averting deal

  • But most of all I’m thankful for so-called “seasonals” (a fancy word for the uncanny tendency of equity markets to rally in November), which might have gone farther in helping explain why Tuesday’s CPI release appeared so intoxicating to markets than anything of a more fundamental nature. 

What to watch this week 

This week’s main event will be Thursday’s Thanksgiving holiday and the four-day weekend that comes with it. Of course markets aren’t really closed on Black Friday, but trading volumes typically run far lower than average, and both stock and bond trading will shut down early so traders can rush out and hunt for doorbusters alongside the rest of us. 

Sales trends on Black Friday are always analyzed closely as an indication of exactly how strong each year’s holiday shopping season is likely to be. And they’re almost always stronger than expected. While the rise of online shopping has taken some of the efficacy out of those in-store numbers (as well as almost all of the fun of lining up before dawn in a frozen parking lot to hopefully grab a $150-dollar flatscreen), you should probably expect to read about how much cash Americans dropped during this year’s post-Thanksgiving Friday as an indication of how confident they are about the future. That’s doubly true this year as the health of the consumer remains very much in focus

In terms of published economic data, the most interesting read might well be Tuesday’s release of the Federal Reserve’s minutes from the November 1 FOMC meeting. As always, the minutes represent the official notetaking of the Federal Reserve’s two-day meeting that produces its regularly scheduled decisions on rates, with the minutes always released three weeks after the actual decision. Key things to look for inside the release will be how seriously the debate was influenced by market volatility and the associated impact on financial conditions, as well as the extent to which Fed officials remain concerned about inflation (keeping in mind that officials didn’t yet have access to the most recent CPI and PPI data when they were having this debate). 

Next on the list is probably Wednesday’s final November read of consumer sentiment, brought to us by the University of Michigan. Here the most important line item will be any update to consumers’ inflation expectations, which have undergone a fairly dramatic increase in recent weeks. If that continues, it will almost certainly grab the attention of Fed policymakers. If the UofM’s survey shows that inflationary fears are becoming entrenched, expect that to loom larger in the narrative. 

Meanwhile, purchasing managers’ indices for both the manufacturing and services sectors are due from S&P Global on Friday. These and other similar surveys have been largely consistent: trends in services are weakening, while manufacturing is working back toward break-even after a long period of contraction.

Finally, Monday’s release of the index of leading economic indicators from the Conference Board could be revealing. While the LEIs are not always immediately impactful to markets, watch Monday’s release for two things: First, whether the index continues to point toward a recession as it has for several months, and second whether the breadth of indicators suggesting a slowdown has remained wide. In recent editions of the LEI, the number of components making negative contributions has far exceeded those making positive contributions. 

 

 

 

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Tom Nun, CFA

Contributor

Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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