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The inflation data for October was better than expected and, on many levels, the lowest in months. Both year-over-year consumer and wholesale price indices are substantially lower than the peak rates reached earlier this year. Headline CPI is 7.7%, 1.4 percentage points below the high mark in February, while headline PPI is 8%, 3.7 percentage points lower from March. Improvements in supply chains, softer consumer demand and weakening commodity prices are contributing to softer goods prices. Much of the drop on the consumer side came from falling used car and apparel prices, down 2.4% and 0.7% respectively. Unfortunately, food and gasoline, the two items every consumer depends on, continue to be high in spite of improvements in warehousing and transportation. Core services prices are coming down but remain elevated. Shelter prices, which account for more than one-third of CPI, accounted for more than half the rise in core consumer prices.
The question facing everyone now is if the lower levels are enough to sway the Federal Open Market Committee to slow the pace of future interest rate moves. A full pivot is still out of the question but raising rates by smaller amounts may be the compromise the financial markets receive. The better likelihood is for a 50 basis point rise in December, instead of 75 basis points. A review of this week’s multitude of Fed comments reminds us that even the most dovish of committee members favor higher terminal rates. Of the eight interviews and presentations made this week, the consensus points to a Fed that has no plans to pause rate hikes. They contend there is still “a ways to go” before rates are restrictive enough to bring down inflation. The committee unofficially placed the terminal rate close to 5%, with one member being bold enough to suggest 7%. The October inflation reports suggest inflation is moving in the right direction, offering glimmers of hope.
Key Indicators this Week
Retail Sales – Retail sales rose 1.3% last month, better than expected and the best number since February. The report goes against economists’ view that the consumer is pulling back. Instead, the report shows continued resilience against rising prices. Recent earnings reports from Walmart and Target suggest consumers are shifting buying habits to get around higher costs. Walmart noted an increase in sales from higher-income households. Target, known more for discretionary shopping, saw same-store sales rise less than 3% from a year ago as consumers pulled back from impulse buys. The biggest surprise in the retail sales report was the jump in auto sales, up 1.5%. Auto sales, next to housing, is the second most interest rate-sensitive sector behind housing. October’s strong sales activity represents a rebound from months of low auto supply and pent-up demand. Nine of the 13 major categories in the retail index were positive. Gasoline and grocery store sales were much higher than expected, most likely due to higher prices.
Interest Rate Watch – The two-year to 10-year Treasury spread fell to minus 67 basis points this week, the most inverted since 1982. The spread between the three-month T-bill and the 10-year Treasury fell to minus 54 basis points, the most inverted since 2007. Both curves are considered key recession indicators.
Note: Behind the Numbers will not be published next week. The report will resume on December 2 with the Monthly Overview and Data Report and Credit Union Rate Survey. On behalf of Catalyst Corporate, I want to wish you and your families a wonderful Thanksgiving.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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