(Bloomberg) — Stocks struggled after data showed hotter-than-expected inflation and a slowdown in the labor market, amplifying the debate on whether the Federal Reserve will opt for a smaller rate cut next month or pause after a large September reduction.
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Following a rally to all-time highs, the S&P 500 took a breather. While Thursday’s economic figures were not perceived by Wall Street as catastrophic, they certainly highlighted the Fed’s challenge of bringing inflation back to target without causing a recession. And that has added to the debate about the Fed’s next steps. For now, bond traders continued to bet the central bank will reduce the pace of cuts to 25 basis points in November.
The so-called core consumer price index — which excludes food and energy costs — increased 0.3% from August and 3.3% from a year ago. Meantime, applications for US unemployment benefits rose last week to the highest in over a year, reflecting large increases in Michigan, as well as states affected by Hurricane Helene.
In a note titled “The Fed’s quandary as inflation warmer while labor cooler,” Quincy Krosby at LPL Financial says the latest economic numbers were not the combination the Fed wants to see.
“If inflation data continues to indicate that prices are generally rising amid a backdrop of a cooler labor market, the Fed’s next meeting will undoubtedly involve a more heated discussion of which of the Fed’s mandates takes precedence.”
Atlanta Fed President Raphael Bostic told the Wall Street Journal he was open to standing pat or cutting rates by a quarter point next month. His Richmond counterpart Thomas Barkin expressed optimism about inflation’s progress, but said the fight wasn’t over, citing potential risks that could stoke price pressures.
“The Fed said the last mile getting toward their inflation target is going to be tough, and that is what we are seeing,” said David Donabedian at CIBC Private Wealth US. “But we still expect the Fed to cut rates by a quarter point in November, and likely a similar cut at the December meeting.”
The S&P 500 fell 0.1%. Most major groups retreated, though energy shares joined oil higher as speculation about Israel’s response to the Iranian missile attack continued to whipsaw the market. Megacaps were mixed, with Nvidia Corp. up and Apple Inc. down. Tesla Inc. gained as investors awaited the first look at the company’s fully self-driving vehicle later Thursday.
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The yield on 10-year Treasuries advanced four basis points to 4.11%. The Bloomberg Dollar Spot Index wavered.
Wall Street’s Reaction:
Today’s CPI report will lower enthusiasm around rate cuts next month, and if some of these other catalysts increase uncertainty, it could act as a short-term excuse for markets to pull back — particularly with the S&P 500 at all-time highs.
If anything, the report was good enough to solidify the case for another quarter-point cut. Inflation hasn’t receded so rapidly to justify an accelerated pace of policy easing, but the upside surprise also wasn’t sufficient to raise serious questions about the underlying disinflationary trend.
The Fed is likely to continue to cut short-term interest rates at the next decision in November, but this time by just a quarter percent, not the half-point cut they made in September. The Fed is glad inflation is getting close to their target, but they would like to see core inflation slow further to be more confident that the slowdown in inflation will persist into 2025.
The Federal Reserve isn’t yet in position to declare ‘mission accomplished’ in the battle against inflation, and the ride to the 2% target continues to be bumpy at times.
Mindful of its dual mandate prioritizing maximum employment and stable prices, it will be eager to see the next monthly jobs report in early November before the next announcement on rates. A safe bet for now is rate reductions of one-quarter of 1% at the final two meetings of the year.
When interest rates aren’t high enough to lower growth, they aren’t high enough to stifle inflation completely either. The Fed will lower rates, but at a measured pace from here.
One slightly hotter-than-expected CPI reading doesn’t mean a new wave of inflation has been unleashed, but the fact that it accompanied a jump in weekly jobless claims may add to short-term market uncertainty.
We’re in a “good news is good, bad news is bad” environment, and these weren’t good numbers — but that doesn’t mean they upended the larger outlook for solid economic growth and moderate inflation.
The Fed has shown that they’re willing to let inflation potentially run hotter than normal in favor of full employment. Only a rise towards 4% inflation or a few hot inflation prints in a row would alter the Fed’s course of continued rate cuts over the next year.
Given that the most recent jobs report was so strong, it was possible that a big upside surprise to inflation could have caused the Fed to pause at the next meeting and leave rates unchanged.
However, given that this month’s report was a little higher than expected it is still likely that the Fed will go ahead and cut by 25 bps next month and – if nothing in the labor market or inflation readings materially changes by the end of the year – another 25 bps in December.
The market reacted negatively to recent indications from policymakers that the next cut would be 0.25%, however, history tells us that consecutive dramatic rate cuts tend to come about when the economy is in distress, so while we expect a cut next month, investors may be wise to hope for a gradual drop.
Corporate Highlights:
Delta Air Lines Inc. forecast profit and sales short of Wall Street’s estimates for the final months of the year, suggesting a slow recovery from a challenging summer travel season.
Domino’s Pizza Inc. trimmed its 2024 projection for sales growth and new locations as slower consumer spending hits the restaurant industry.
Pfizer Inc. company officials threatened legal action against two former top executives who had been working with Starboard Value to push for changes at the drugmaker, the activist investor alleged Thursday in a letter to the company’s board.
GXO Logistics Inc., the supply-chain services provider that spun off from trucking company XPO Inc. in 2021, is exploring a sale, according to people familiar with the matter.
Eli Lilly & Co. is ramping up its legal campaign against companies that were temporarily allowed to make and sell copycat versions of its blockbuster drugs used for weight loss until a US shortage ended last week.
Toronto-Dominion Bank will pay about $3 billion in penalties and face restrictions on its US growth in a settlement with regulators over its failure to catch money laundering, the Wall Street Journal reported.
Key events this week:
JPMorgan, Wells Fargo kick off earnings season for the big Wall Street banks, Friday
US PPI, University of Michigan consumer sentiment, Friday
Fed’s Lorie Logan, Austan Goolsbee and Michelle Bowman speak, Friday
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.1% as of 1:32 p.m. New York time
The Nasdaq 100 was little changed
The Dow Jones Industrial Average fell 0.2%
The MSCI World Index fell 0.1%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.2% to $1.0918
The British pound fell 0.2% to $1.3049
The Japanese yen rose 0.3% to 148.89 per dollar
Cryptocurrencies
Bitcoin fell 0.2% to $60,245.3
Ether rose 1.5% to $2,389.72
Bonds
The yield on 10-year Treasuries advanced four basis points to 4.11%
Germany’s 10-year yield was little changed at 2.26%
Britain’s 10-year yield advanced three basis points to 4.21%
Commodities
West Texas Intermediate crude rose 3.9% to $76.09 a barrel
Spot gold rose 0.6% to $2,623.60 an ounce
This story was produced with the assistance of Bloomberg Automation.
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