Halyard’s Weekly Wrap – 11/17/23 – Market removes Fed hikes and moves forward a rate cut!

The October Consumer Price Index, at the headline level, was a welcome panacea for investors’ perception of inflation.  Coming in at 3.2% year-over-year, CPI was universally greeted as good news and interest rates plunged across the curve.  Looking beyond the headlines at some of the subcomponents raised suspicions that some of the data had been “fudged.”  Specifically, the price of health insurance.  For many, November is healthcare renewal season and it’s never cheaper to renew than it was the previous year.  And certainly not 33.98% cheaper as measured by the BLS report due to a change in calculation methodology.  That was one of the subcomponents that stuck out in Tuesday’s report.  Nonetheless, the bigger picture is that inflation is falling, and the Fed can take solace in that fact.  Moreover, that inflation report pretty much takes a rate hike at the December meeting off of the table as reflected in the Fed Futures market.  Futures are now implying no further hikes and a rate cut of 25 basis points by next summer.

On Wednesday, the retail sales report continued the trend of beating consensus estimates, supporting the bullishness in both the stock and bond markets.  As we’ve mentioned repeatedly, retail sales have been strong since spring and the last three months have been on a tear.  With that, expectations were for October retail sales to fall -0.3% from the September print.  Instead, the decline was only -0.1% and September sales were revised higher to 0.9% from the original 0.7% month-on-month gain.

Despite the better-than-expected results in inflation and retail sales, the CEOs at Walmart and Target, during their earnings calls this week, cautioned that consumer spending is pulling back.  Target CEO Brian Cornell said that “pressures like higher interest rates, resumption of student loan repayments, increased credit card debt, and reduced savings rates” are forcing consumers to make trade-offs in their spending habits.  That was not very encouraging to hear in the middle of the holiday selling season.

Despite that warning, it was a good week for stocks and bonds.  The S&P 500 rallied more than 2% for the week and the yield-to-maturity of the 30-year bond continued to drop, closing at 4.57%.  The move since the first of the month has been a reinversion of the 2-year/30-year spread to -31 basis points.  The assumption permeating the uptick in investor psychology is that the rate rise is over.  We think that seems likely.

Looking forward to next week’s holiday shortened week, with the exception of the minutes from the November 1^st FOMC meeting, investors will get a handful of secondary economic indicators.