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What you need to know today
Unchanged prices
Prices in the U.S. were flat in October compared with a month ago, according to the consumer price index. Year on year, prices increased 3.2%. Both figures are 0.1 percentage point lower than economists expected. Core CPI, which strips out food and energy, rose 0.2% for the month and 4% for the year — the lowest in two years. Core CPI numbers were also 0.1 percentage point lower than expected.
Boost from CPI
U.S. stocks jumped Tuesday on the cooler-than-expected CPI report, with major indexes notching their best day since April. Meanwhile, Treasury yields tumbled. Asia-Pacific markets surged Wednesday as well. Hong Kong's Hang Seng Index popped 2.82% to its highest level in over a week, while Australia's S&P/ASX 200 added 1.37% to hit an eight-week high.
Uneven recovery
Latest data from China showed economic recovery's still uneven. Retail sales in October jumped 7.6% from a year ago, more than the 7% expected. Also beating estimates was industrial production, which grew 4.6% year on year. Fixed asset investment from January to October grew 2.9%, but was less than forecast. And real estate continued struggling, with investment plunging 9.3% in the same period.
From growth to contraction
Japan's economy is on shaky ground too. The country's gross domestic product shrank 2.1% on an annualized basis in the third quarter of the year, according to provisional government data. It's a stark contrast with the annualized 4.8% GDP growth Japan enjoyed in the April-to-June quarter — and a contraction much larger than the 0.6% decline economists predicted.
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The bottom line
The word "exuberance" has a negative connotation when used to describe markets. In 1996, Former Federal Reserve Chair Alan Greenspan used the term "irrational exuberance" as an implied warning to the stock market when the dot-com bubble was still inflating. Greenspan, of course, proved prescient.
It's hard to describe yesterday's market movements as anything but exuberant. This time, however, there's a rational basis behind them: Inflation's receding. Prices were unchanged month on month, while the headline core CPI reading for October was the smallest increase in two years.
Chicago Fed President Austan Goolsbee called the report "slow but clear progress" on bringing inflation below 2% — and raised hopes "we may do that with an unemployment rate that never gets above 4 percent."
Goolsbee's comments were measured, as befits a Fed official. Others were more, well, exuberant.
AXS Investments CEO Greg Bassuk called the data an "early holiday present" because it effectively removed any chance the Fed will hike interest rates further. The options market implied around a 5% chance of a December or January hike, according to the CME FedWatch Tool. In fact, markets now think there's a 30.8% chance the Fed will cut rates as early as March.
Indeed, Treasury yields — which reflect investors' expectations of where rates will end up — took a sharp fall in U.S. trading Tuesday. The 10-year yield sank 18 basis points to 4.45% and the 2-year tumbled 21 basis points to 4.83%.
"October's cooler CPI data, combined with a slowing but resilient economy, bodes well for the economy's soft landing, while positioning 2024 for lower interest rates and the prospects for robust stock market growth," Bassuk said.
But we don't have to wait until 2024 to see robust stock growth. The broad-based S&P 500 rallied 1.91%, with all 11 sectors in positive territory. The tech-heavy Nasdaq Composite jumped 2.37% and the Dow Jones Industrial Average added 1.43%. Yesterday was the best showing for the S&P and Nasdaq since April.
Still, as positive as October's CPI report was, we shouldn't forget Fed Chair Jerome Powell's recent warning of "being misled by a few good months of data." The chances that the report was an anomaly are low, it's true. But the line between rational and irrational exuberance can be thin, especially in markets.
