October's CPI could solidify the case for a terminal rate above 5%: what you need to know this week

October’s CPI could solidify the case for a terminal rate above 5%: what you need to know this week

A new government inflation reading and the U.S. midterm elections are the most anticipated events on Wall Street’s radar this week as investors continue to digest the latest interest rate decision. Fed.

Thursday morning will bring traders the closely watched Consumer Price Index (CPI) for October. Economists polled by Bloomberg see the headline CPI at an annual rate of 7.9% for the month, a moderation from September’s 8.2% year-on-year increase. Core CPI, which excludes the volatile food and energy components from the measure, is expected to come in at 6.5%, little change from 6.6% last month.

Stocks, meanwhile, could also take inspiration from the outcome of this year’s midterm elections on Tuesday. All three major indexes closed higher on Friday, but lower for the week on the heels of October jobs data, a rush to reports of below-average incomes and another rise in Federal Reserve rate which was accompanied by assertions of further hikes to come.

In the five days to Friday, the Dow Jones Industrial Average fell 1.5%, the S&P 500 3.3% and the Nasdaq Composite 5.7% – the strongest component index’s worst weekly performance technology since January as mega-caps Apple (AAPL), Amazon. com (AMZN) and Alphabet (GOOGL) each lost more than 10% after third-quarter financial results disappointed Wall Street.

The U.S. economy added 261,000 jobs in October, another strong hiring figure seen as confirmation for policymakers that working conditions can withstand another hike in the Fed’s key interest rate to combat historical inflation. The central bank made a fourth consecutive hike in interest rates by 75 basis points while hinting at a slower pace of rise but a higher final rate.

Investors were hoping for signals from the central bank on a potential easing of monetary plans, which would serve as a tailwind for the major indexes after closing higher last month on expectations of a political pivot. But Powell pushed back against the idea that a change in the Fed’s course is imminent, with inflation and the wage bill still high.

“Restoring price stability will likely require tight policy to continue for some time,” he said in prepared remarks following Wednesday’s policy announcement. “Recent inflation data is again higher than expected.”

Federal Reserve Board Chairman Jerome Powell holds a press conference after Powell announced that the Fed had raised interest rates by three-quarters of a percentage point as part of their ongoing efforts to combat the inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz

Federal Reserve Board Chairman Jerome Powell holds a news conference in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz

A flurry of Wall Street strategists raised their expectations for how far the Federal Reserve will raise its key interest rate after Powell’s ‘slower but higher’ message on Wednesday – and October’s CPI this week could confirm the revised forecast, while offering investors clues as to the magnitude of December’s increase.

Goldman Sachs was the first among the big banks in the days leading up to November’s FOMC meeting to warn that rates could rise as high as 5% by March 2023.

TD Securities raised its terminal rate forecast from a range of 4.75% to 5.00% to 5.25% to 5.50% and expects a 50 basis point hike at the next meeting of the 13th and December 14. BNP Paribas expects a fifth hike of 75 basis points next month and a final federal funds level of 5.25% in the first quarter of next year.

After Friday’s jobs report, Bank of America economists revised their projections up to a terminal rate of 5.0-5.25% from 4.75-5.0% and forecast an increase of 50 basis points for December.

“We believe the risks to our revised FOMC rate path continue to be on the upside and the upcoming CPI inflation printouts and November jobs report will weigh heavily on the near term path. term of Fed policy,” the strategists led by Michael Gapen said on Friday. Remark.

On Tuesday, Wall Street will tune in to see which party controls the legislative branch of government and several gubernatorial seats in what could be the first midterm election since 2006 where the majority party in the House and Senate – the Democrats, in this case – loses its grip on control.

The elections generally brought volatility to the market in the short term, but relative calm in the ensuing three months, wrote Abhishek Gupta and Román Mendoza of MSCI Research in a recent note.

“Focusing on the medium term, historically, the broader US stock market has, on average, reacted positively to the ability of the ruling political party to maintain its position in both houses of Congress,” they wrote. “A change in control has led to uncertainty about the president’s party’s ability to pass bills and influence regulations, leading to increased volatility on a relative basis.”

People attend a campaign supporting U.S. Democratic Senatorial candidate John Fetterman and Democratic candidate for Pennsylvania Governor Josh Shapiro, in Philadelphia, Pennsylvania, U.S., November 5, 2022. REUTERS/Hannah Beier

People attend a campaign supporting U.S. Democratic Senatorial candidate John Fetterman and Democratic candidate for Pennsylvania Governor Josh Shapiro, in Philadelphia, Pennsylvania, U.S., November 5, 2022. REUTERS/Hannah Beier

On the corporate side, the results season continues to continue in its home stretch. Of the 85% of S&P 500 companies that have reported actual results for the third quarter so far, 70% reported earnings per share above estimates, below the 5-year average of 77% and below average. over 10 years by 73%, by FactSet Research. And among those whose numbers were above expectations, the average pace was just 1.9% above forecast, significantly below the 5-year average of 8.7% and the 10-year average of 6. 5%.

If the 1.9% is the last percentage beat for the quarter, it will be the second-lowest earnings surprise average for companies in the index in the past nine years.

Earnings headliners this week include Activision Blizzard (ATVI), BioNTech (BNTX), Lyft (LYFT), Walt Disney (DIS) and Rivian Automotive (RIVN).

Economic calendar

Monday: Consumer creditSeptember ($30 trillion, $32.241 billion)

Tuesday: NFIB Small Business OptimismOctober (91.3 expected, 92.1 in previous month)

Wednesday: MBA Mortgage Applicationsweek ended November 4 (-0.8% over the previous week); Wholesale Salesmonth-over-month, September (0.4% expected, 0.1% in prior month); Wholesale inventorymonth-over-month, September final (0.8% expected, 0.8% in prior month)

Thursday: Consumer price indexmonth-over-month, October (0.6% expected, 0.4% in prior month); CPI excluding food and energy, month-over-month, October (0.5% expected, 0.6% in prior month); Consumer price indexyear-on-year, October (7.9% expected, 8.2% in prior month); CPI excluding food and energyyear-on-year, October (6.5% expected, 6.6% in prior month); NSA CPI IndexOctober (298,572 expected, 296,808 in previous month); IPC Core Index AGOctober (300,094 expected, 298,660 in previous month); Real average hourly gains, year-over-year, October (-3.0% over the previous month); Real Average Weekly Earningsyear-over-year, October (-3.8% over the previous month); Initial jobless claimsweek ended November 5 (220,000 expected, 217,000 the previous week); Continuing claimsweek ended October 29 (1.500 million expected, 1.485 in previous week); Monthly budget statementOctober (-$95.0 billion expected, -$429.7 billion in prior month)

Friday: University of Michigan Consumer SentimentNovember Preliminary (59.5 expected, 59.9 in previous month); Current University of Michigan TermsNovember preliminary (expected 63.4, 65.6 in previous month); University of Michigan ExpectationsNovember preliminary (54.5 expected, 56.2 in previous month); U. of Michigan 1-Year InflationNovember Preliminary (5.1% expected, 5.0% in previous month); U. of Michigan 5-10 Year InflationNovember Preliminary (2.9% expected, 2.9% in previous month)

Earnings Calendar

Monday: Activision Blizzard (ATVI), BioNTech (BNTX), Choice Hotels (CHH), Groupon (GRPN), Lyft (LYFT), Mosaic (MOS), Plantir Technologies (PLTR), Take-Two Interactive Software (TTWO), TripAdvisor ( TRAVEL)

Tuesday: Affirm (AFRM), Allbirds (BIRD), AMC Entertainment (AMC), Constellation Energy (CEG), Coty (COTY), DuPont (DD), GoodRX (GDRX), Lemonade (LMD), Lordstown Motors (RIDE), Lucid Group (LCID), News Corp. (NWSA), Norwegian Cruise Line (NCLH), Novavax (NVAX), Occidental Petroleum (OXY), Planet Fitness (PLNT), Upstart (UPST), Walt Disney (DIS), Wynn Resorts (WYNN)

Wednesday: AppLovin (APP), Beyond Meat (BYND), Bumble (BMBL), Canopy Growth (CGC), Hilton Grand Vacations (HGV), iRobot (IRBT), Rivian Automotive (RIVN), Roblox (RBLX), SeaWorld Entertainment (SEAS) , Starwood Property Trust (STWD), Signify Health (SGFY), Unity Software (U), Wendy’s (WEN), ZipRecruiter (ZIP)

Thursday: AstraZeneca (AZN), Brookfield Asset Management (BAM), Compass (COMP), Dillard’s (DDS), Honest Company (HNST), LegalZoom.com (LZ), Nio (NIO), Poshmark (POSH), Ralph Lauren (RL) , Six Flags (SIX), Tapestry (TPR), Toast (TOST), Utz Brands (UTZ), Warby Parker (WRBY), WeWork (WE)

Friday: Spectrum Marks (SPB)

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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