CIO Notebook : October Inflation Data: More Treat Than Trick

November 14, 2023

In our view, the inflation and non-farm payrolls prints together may be enough to keep the Fed on the sidelines through the end of 2024 as they reflect a softening in the U.S. economy despite a steamy Q3 GDP of +4.9%.

October U.S. inflation data was released today, coming in lighter-than-expected and bucking the trend over the last two months. Headline CPI was flat month-over-month and up +3.2% year-over-year, versus expectations of +0.1% and +3.3%, respectively. Core CPI was even more encouraging, rising only +0.2% from September and up +4.0% on a year-over-year basis. This was compared with expectations of +0.3% and +4.1%, respectively, although the whisper numbers were for the most part higher than consensus. Driving the softer print(s) were more muted increases in owner’s equivalent rent which represents shelter as well as energy, used cars, medical care services, hotel rates, and airfares. Auto insurance and certain food categories were slightly higher than the previous month.

This data comes on the back of the release of the October non-farm payrolls report last week which also came in below consensus -- the U.S. economy added +150k jobs versus expectations of +170k to +180k and unemployment came in at 3.9%. More importantly, average hourly wages increased by only +0.2% for the month, lighter than the +0.3% forecast. The average work week also declined slightly to 34.3 hours as did the participation rate which fell to 62.7%.

In our view, these two prints together may be enough to keep the Federal Reserve (Fed) on the sidelines through the end of 2024 as they reflect a softening in the U.S. economy despite steamy Q3 GDP of +4.9%. Following the Fed meeting earlier this month, the probability of a rate hike in December stood at 19.4% according to the CME FedWatch Tool. That has dropped to 0% as of today. Despite the market expectations, however, Fed Chairman Jerome Powell and the other members of the Fed are likely to continue to drive home the importance of data and their desire to keep policy restrictive until inflation is back down to target.

One might argue then that these prints may bolster a foundation for less bond market volatility through the end of the year as well. Our view is that it is not only the Fed which is driving the day-to-day fluctuations in yields, but also the supply-demand dynamics of a meaningful federal government deficit and continued spending which are resulting in higher Treasury issuance. As a result, one might expect to see bond market volatility persist into 2024 even if the Fed is done hiking rates. For now, both stock and bond investors are benefiting from today’s news, as U.S. stocks are higher to start the session and Treasury yields have fallen across the curve.


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