Lower-than-expected consumer inflation data launched major U.S. stock indices higher last week. CPI rose 7.7% during October versus Bloomberg analyst estimates of 8.0%. Markets loved the data, and the S&P 500 had its largest daily gain since April 2020.
For the week, the S&P 500 increased by 5.90%, the Nasdaq 100 rallied by 8.84%, and the Dow Jones Industrial Average rose by 4.15%.
Bond Yields Fall
10-year note yields fell hard last week, closing the week at 3.813%, down from their previous weekly close of 4.157%.
This sharp fall shows the conviction of market expectations for a smaller rate hike at the December Federal Reserve meeting. As of late, these hopes have been fueled predominantly by the lower-than-expected inflation report.
In addition, there’s great news for would-be homebuyers: Many mortgage interest rates fell last week in tandem with lower bond yields. When the 10-year note yield moves in one direction, so do mortgage rates. Last week, the average 30-year mortgage rate declined from the low- to mid-7s to the upper-6s.
December Federal Reserve Meeting
Markets will soon look ahead to the December 15th Federal Reserve meeting, where the probability of a 50-basis-point hike is 80.6% and the chance of a 75-basis-point hike is 19.4%, per the CME FedWatch tool as of Tuesday morning.
The lower-than-expected inflation data surely put the hopes of a 50-basis-point hike in focus, as perhaps the Fed’s rate hike crusade of 2022 is starting to show some results.
Bear Market Rally or the Start of Something Else?
After some impressive showings by the major U.S. stock indexes over the last couple of weeks, market sentiment has shown signs of improvement.
2022 has proven to be a challenging market, with inflation and rate hikes serving as the primary headwinds. Year-end is approaching, and market bulls are cheering for potentially lower rate hikes to come in the future.
Historically, market bottoming processes have taken weeks or months after extended periods of decline. The next jobs report on November 30th should impact the Fed’s rate hike decision and rhetoric at the December 15th meeting.
U.S. Dollar Eyed
The U.S. Dollar Index declined along with bond yields last week. Many traders and analysts will be watching the U.S. dollar for further weakness, as the rising dollar theme in 2022 has coincided with lower stock prices.
Has Inflation Peaked?
The general consensus at present seems to be that inflation has peaked. However, nobody knows for sure, and even if it has peaked, peaking and declining are two very different things.
Even if we have seen a peak in inflation, the Fed may have more work ahead to get the inflation rate down to its 2% target. The “work” would most likely come in the form of interest rate hikes, albeit potentially at a slower pace.
The path to reach the 2% inflation target is unclear in duration and action at this time. For now, stock market bulls are cheering the first sign of a potential decline in inflation.
Consumer Sentiment
Last Friday featured the most recent Preliminary Consumer Sentiment reading, courtesy of the University of Michigan’s Consumer Sentiment Index. It showed a weaker-than-expected result of 54.7. This was down from October’s reading of 59.8 and below estimates of 59.5.
Anxieties surrounding inflation persist in the minds of the collective consumer. Consumer sentiment data showed expectations of a 5.1% increase in costs from present levels over the next year–versus 5.0% in last month’s reading.
About Consumer Sentiment Index
The University of Michigan’s Consumer Sentiment Index is a survey of 500 consumers, which asks them to rate present and future economic conditions. There are two versions of consumer sentiment data, released about 14 days apart: the preliminary reading and the revised reading. Last week’s release was the preliminary data, and it tends to have the most impact of the two releases since it comes out first.
The consumer sentiment data came out the day after the CPI data, and it did not affect stock markets to the downside. Bulls continued to cheer the CPI data last Friday.
Cryptocurrency Volatility
Most cryptocurrencies finished last week in the red, as the financial difficulties of the Bahamian exchange, FTX, wreaked havoc on the space.
As the FTX exchange cracked, cryptocurrencies traded lower, souring sentiment to the overall crypto space. Bitcoin finished lower by around 20% last week on U.S. Exchange Coinbase–trading near $16,300 at last check.
Bitcoin is still well above its 2020 pandemic low of around $4,000 and well below its 2021 high north of $69,000. Talk about volatility!
FTX and Big Names Like Tom & Gisele
The beleaguered exchange has forged major partnerships, including with Major League Baseball, and the Miami Heat Arena was even renamed FTX Arena.
Investors in FTX include Tom Brady and Gisele Bundchen. They are rumored to have large exposure to the exchange. Exact investments were not known at the time of writing.
Volatility, Seasonality, and Long-Term Investing
Major U.S. stock indexes rose precipitously on the weaker-than-expected consumer inflation data. Seeing the high volatility of stock indexes in both directions (up and down) is a solid reminder of why it pays off to be a long-term investor.
Markets are now in a seasonally bullish time of year, and there could be a substantial amount of cash entering equities. November and December tend to be good months for stocks, historically.
Looking Ahead
Level-headedness is paramount to success in long-term investing, and pragmatically, nobody knows with any degree of certainty that inflation has peaked yet.
The current consensus among many market participants is for smaller rate hikes at future Fed meetings. However, it is wise to consider that we are still in a higher interest rate environment that can present challenges and opportunities over an extended period.