This scenario would mean the Fed “pause,” which occurs between the hiking and cutting cycles, is already underway. And per research from BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri, the pause period is the time investors should own stocks, not collect interest on their cash in money market funds.
“This might be a good time for investors to step out of cash,” Chaudhuri said, referencing a chart that shows stocks outperform during the pause period. Per Chaudhuri’s research, the pause period began the day of the Fed’s last hike on July 26.
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Crude prices fall to lowest level since June
Oil prices slid on Tuesday with crude oil (CL=F) falling about 3% to trade below $70 a barrel, its lowest level since June. Brent crude (BZ=F) also dropped 3% to trade at just below $74 a barrel.
The moves comes amid renewed concerns over shipping disruptions in the Middle East after a Norwegian tanker was hit by a missile from Yemen’s Iran-backed Houthi rebels. Oil prices have been steadily declining over the past several weeks, notching their longest losing streak since 2018.
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Just because the market wants it…
Inflation continued to moderate in November, but a hot “core” reading, which strips out the more volatile costs of food and gas, will likely keep rate cuts on the sidelines (for now).
“Another sharp drop in gasoline prices last month kept headline CPI inflation on a downward trend but core inflationary pressures remain more stubborn, with core inflation unchanged at 4%,” wrote Michael Pearce, lead US economist at Oxford Economics. “With underlying inflation set to trend lower only gradually next year, we expect Fed officials to push back hard on market expectations that rate cuts could come as soon as spring.”
This was the first time since March that the annual core inflation rate did not decline. Within core inflation, the shelter index rose 6.5% on an unadjusted annual basis to account for nearly 70% of the total increase. On a monthly basis, the index increased 0.4%, a slight uptick from October’s 0.3% monthly jump.
Rent prices also remained remained elevated. The index for rent and owners’ equivalent rent each rose 0.5% on a monthly basis. Owners’ equivalent rent is the hypothetical rent a homeowner would pay for the same home.
Markets, however, still expect the central bank to begin cutting rates at its March meeting, pricing in a roughly 40% chance of a rate cut. Economists aren’t completely convinced a rate hike will come at that time.
“Overall, this will do little to change the Fed’s recent communications that core inflation remains too strong to contemplate shifting to rate cuts any time soon,” Pearce said. “Market expectations of rate cuts early next year are likely to be disappointed. We see more stubborn wage and core inflation pressures keeping the Fed on prolonged hold, with cuts likely to be delayed until September.”
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Stocks open mixed after CPI report
The Dow Jones Industrial Average (^DJI) ticked up about 0.1%, or nearly 50 points, while the S&P 500 (^GSPC) dropped around 0.1%. Contracts on the tech-heavy Nasdaq Composite (^IXIC) traded flat, after all three major gauges closed Monday at their highest levels since early 2022.
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Inflation data for November showed price pressures continue to moderate in the US economy, though not at the kind of rapid pace that would put considerable pressure on the Federal Reserve to cut interest rates in short order.
The Consumer Price Index (CPI) for November showed headline inflation rose 0.1% over the prior month and 3.1% over the same month last year. Economists had expected monthly inflation to be flat and annual inflation to hit 3.1%.
On a “core” basis, which strips out the cost of food and energy, prices rose 0.3% over last month and 4% over last year, both in line with estimates.
The main drivers of November’s inflation data were the cost of energy — which fell 2.3% in November — and shelter, which rose 0.4% in November, a pickup from October’s 0.3% increase. The cost of gasoline fell 6% in November.
On Monday, economists at Goldman Sachs pulled forward expectations for when the Fed would cut interest rates to the third quarter of next year on account of inflation falling faster than expected.
Tuesday’s report shows this process continues to occur at an uneven pace.
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US stocks inched higher by mid-morning trading on Tuesday as a key inflation report showed prices largely holding steady ahead of the Federal Reserve’s final 2023 policy meeting.
The Dow Jones Industrial Average (^DJI) edged up roughly 0.3%, or nearly 100 points, while the S&P 500 (^GSPC) traded flat. Contracts on the tech-heavy Nasdaq Composite (^IXIC) moved up about 0.2% after all three major gauges closed Monday at their highest levels since early 2022.
The Consumer Price Index (CPI) showed prices ticked up slightly at 0.1% over last month and 3.1% over the prior year in November, as Yahoo Finance’s Alexandra Canal reported.
Investors are widely expecting a pause to rate hikes at the end of the central bank’s two-day meeting, which starts Tuesday. But traders are easing back on their bets on a rate cut in March, according to CME FedWatch data.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
While consumer inflation is expected to remain flat for the second straight month, the “core” reading — which excludes food and energy prices — could prove stickier. That would likely prompt investors to rethink when the Fed might start lowering rates.
Following the report, US bond yields retreated slightly, with 10-year Treasury yields (^TNX) down roughly 2 basis points to trade near 4.22%.
In individual stocks, Oracle (ORCL) shares sank more than 10% after the software giant’s second quarter sales fell short of estimates.
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