Two key economic readings greet us this morning, the initial and ongoing jobless claims (which typically come out every Thursday morning, but have moved a day earlier due to Veterans Day tomorrow) and the Consumer Price Index (CPI) for October, which tracks yesterday’s Producer Price Index (PPI). Together they represent a very good “real time” snapshot of inflation in the economy.
The CPI reading was high enough to trigger some alarms on Wall Street: a + 0.9% rise in consumer prices is 30 basis points higher than expected and more than double the September headline +0, 4%. Excluding volatile food and energy prices, known as the “base” reading, we see + 0.6% – 20 basis points ahead of expectations and tripling the + 0.2% that we saw in September. Inflation, are you interested?
The overall year-over-year CPI hit + 6.2% in October, ahead of the expected + 5.9%, and the highest we’ve seen on this measure in 31 years. We’re also seeing year-over-year CPI readings by month at + 5% or more for the past five consecutive months. The year over year core stands at + 4.6%, also very hot and the highest number we’ve seen since July 1991.
We know the Fed is starting to cut its asset purchases per month by $ 15 billion per month, starting from here in November. At this rate, that will take us to mid-2022 before this accommodative policy is raised to $ 0; At this point, it is widely assumed that the Fed will start raising interest rates from their current 0-0.25%. The question now becomes – and a little more urgent than before – should the Fed recalibrate this program so that inflation does not overwhelm the economy?
If this happens, there is an additional risk that the market will cause another ‘tantrum’, such as the one seen in 2013 when current Fed Chairman Jay Powell first came to the Federal Open Market Committee under the Presidency of Ben Bernanke: After months and months of inaction to gradually reduce the Fed’s quantitative easing (QE) program (which was developed to combat the Great Recession of the end of the previous decade), the Fed decided to end the program. Market participants reacted negatively, to put it mildly.
Obviously, Powell doesn’t want to see a repeat of this. But he’s also been patient that current inflation measures are supply-driven, largely on chip shortages from Asia – and that these are temporary economic conditions. The word he has used all year is ‘transient,’ although the half-year of steadily rising inflation we are currently experiencing would test the meaning of that term – but what if the Fed realizes that does she have to go faster? Would they still need to risk another tantrum?
Futures in the market were in the red a bit before the CPI numbers hit the band this morning, and they slipped a bit more before modulating here half an hour before the opening bell . Of course, we are near all-time highs in major indices, but warming inflation could change investor attitudes enough to get us out of the final phase of Goldilocks. Watch this place.
Initial jobless claims hit a new post-Covid low this morning, albeit lukewarm, at 267K last week. This was higher than the consensus estimate of 260K, but still lower than the revised upward 271K the week before, which was initially its own low score on new jobless claims since the start of the pandemic. Continuing complaints fell from the precious week post-Covid low – 2.16 million versus the revised 2.10 million. Yet as we get closer to less than 2 million, it gets us closer to where we were in 2019 and early in 2020, which was very close to full employment.
It would be easy to overthink our current market, but early trading has been admirably cool so far. We are embarking on a spending reduction program, and we will end up raising interest rates, which is a powerful weapon in the fight against inflation. Whether we move forward at the right pace remains an open question, but Powell – or, if he doesn’t reinstate as Fed chairman the next term, whoever will replace him – still has his hands on the wheel.