U.S. equity markets put in their biggest rally last week since the pandemic in 2020, with the Dow, S&P 500, and NASDAQ registering gains of 4.15%, 5.9%, and 8.1%, respectively.
The better-than-expected CPI data released last week was likely the primary driver, though many analysts believe that the midterm election results (and resulting gridlock) had more than a little to do with it.
The October inflation headline reading came in at 7.7%, below the 8.2% reported for September. Markets reacted as though this was a strong signal that inflation has peaked, offering some cover for the Federal Reserve to either slow or reduce future interest-rate increases.
Trading Economics noted that the annual inflation rate “slowed for a 4th month to … the lowest since January, and below forecasts of 8%,” adding,
FIGURE 1: U.S. INFLATION (CPI) RATE—ONE-YEAR TREND
Sources: Trading Economics, U.S. Bureau of Labor Statistics
There was further encouraging news on the inflation front this week. MarketWatch reported on Tuesday, “U.S. wholesale prices rose just 0.2% in October, a fourth straight soft reading that suggests inflation is on the wane after hitting a 40-year high earlier in the year. Economists polled by The Wall Street Journal had forecast a 0.4% gain.”
First Trust, while cautiously optimistic about last week’s inflation report, suggested some restraint in analyzing the results when it comes to future Fed actions:
Over this past weekend, Barron’s amplified the call for caution when it comes to inflation expectations:
Bespoke Investment Group conducted a deep dive into future expectations for the Federal funds rate, noting,
FIGURE 2: FED FUNDS RATE PRICING BY FED MEETING DATE
Source: Bespoke Investment Group
New this week: