The US stock market is down this morning, after the Bureau of Labour Statistics reported that inflation was higher than expected in September.
The consumer price index rose 0.2% in the month of February and 2.4% over the previous year, versus the 0.1% and 2.3% expectations.
The equities markets are reacting negatively to today’s print, mainly on the grounds that it could force the Federal Reserve to refrain from further rate cuts in 2024.
Ian Lyngen, the head of US Rates Strategy at BMO Capital Markets, says that the data released this morning “reinforced” their expectations for a 25 basis point cut in November.
What are the odds of a 25 bps Fed rate reduction in November?
The CME Group’s FedWatch seems to agree with BMO. It also puts the probability of a rate cut of 25 basis points in November at 94%, up from 75% prior to the CPI report.
The fact that inflation is reducing is part of the reason markets are still convinced the central bank will lower its key interest rates.
Sonu Varghese, of Carson Group, told clients today that “the big picture is that inflation continues to lower despite some bumps on the way.”
Interest rate reductions are generally seen as a positive for the stock markets, as they make saving accounts and bonds less attractive. This encourages investors to chase riskier assets like equities as they seek higher returns.
The benchmark S&P 500 is up 22% since the beginning of 2024.
Payroll data trumps inflation reports for Federal Reserve
Whitney Watson, Goldman Sachs, says that investors shouldn’t be too concerned about the higher-than-expected inflation data released today. The payrolls release is a much more important data point to the Federal Reserve.
On Thursday, initial unemployment claims were 258,000. This is well above the 231,000 anticipated and the 225,000 previously.
The data reinforced the need for rate cuts, as the last time unemployment claims were at such a high level was August 2023.
Goldman Sachs remains bullish about the S&P 500. Goldman Sachs even raised its target for the benchmark index at the end of the year to 6,000, signaling a potential 4.0% increase.
“The trajectory of growth is more important for stocks than rate cuts.” Resilient economic expansion should lead to modestly increased bond yields, while continued earnings growth will drive modestly higher equity price,” David Kostin told clients.
This post Why Investors shouldn’t worry today’s inflation data can be modified as new information unfolds
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