Hope all is well with you! As we head into what is a holiday-shortened week for the markets and for many folks, I wanted to keep you up to speed with a quick update.

Overall, major U.S. equity indexes maintained their recent positive momentum last week, courtesy of consumer pricing data coming in below expectations. This key data release begs the question: Is inflation in the rearview mirror?

Tallying last week from a numerical perspective, the S&P 500 rose by 2.24%, the Nasdaq 100 increased by 1.99%, and the Dow Jones Industrial Average was higher by 1.94%. The small-cap Russell 2000 Index, which has become a topic of conversation lately, rose by 5.42% last week.

Inflation Cooler

Last week was overall a quiet one for economic data releases, but Tuesday did bring the much-anticipated Consumer Price Index (CPI) data release.

The report did not disappoint market bulls. Consumer inflation showed a 3.2% rise year-over-year in October, a two-year low that was below Dow Jones estimates of 3.3%. Core inflation, which strips food and energy from the metric, fell to the slowest annual pace since September of 2021, at 4%; this was also below analyst expectations of 4.1%.

Falling energy prices helped the headline (i.e., overall) figure, with oil and gas prices dropping in October.

Stocks have been behaving like inflation is in the rearview mirror. However, it’s worth remembering there is still work to do to get inflation back down to the 2% Fed target rate.

Interest Rates Fall

Cooler inflation = lower interest rates – sounds about right!

Treasury yields fell hard last Tuesday on the CPI data, down to levels not seen since September, closing the week near 4.442%. This was a decrease from the previous weekly close near 4.629%.

Popular mortgage product rates fell in tandem with the 10-year Treasury yield last week. Average 30-year fixed mortgage yield declined to near 7.4%, great news for would-be homebuyers! In turn, mortgage applications saw a 3.04% jump for new purchases.

7.4% is not a “low” rate, but it is a welcome sight for many would-be borrowers, as average 30-year fixed mortgage rates were above 7.75% in October.

Federal Reserve (Fed) Expectations

Markets are currently pricing in a 25-basis-point rate cut in May of 2024 and a full percentage point (100 basis points) in cuts by the end of 2024, per the CME Fedwatch Tool. The softening October consumer inflation data certainly helped to reinforce this outlook, but don’t expect interest rates to suddenly drop like a brick; it ought to be a process, and other factors are still in play.

For the next Fed meeting in December, market expectations currently show a nearly 100% probability of no change in interest rates as of last week’s market close.

Fedspeak comes and goes, but let’s remember that the Fed has broadcasted that rates could stay higher for an extended period.

Consumer Slowdown?

The all-important holiday shopping season is suddenly here! Will the consumer continue to shock analysts and spend, spend, spend?

The reality of an extended period of higher interest rates and inflation could set in for many Americans this season, with early indications showing that holiday shopping spending is off to a slow start this year.

The most recent University of Michigan Consumer Sentiment data showed consumer sentiment at a six-month low. This is some food for thought as we approach the holidays and year-end.

The Takeaway

Expectations for a softer Fed and inflation cooling further are the key drivers in the markets right now. Long-term investors were rewarded in November after a challenging month of October.

Falling energy prices have helped to cool headline inflation, and market watchers will be looking for more price softening going forward. At the same time, the consumer has possibly endured high rates and inflation for a long enough period to dampen the holiday shopping season. Overall, stocks seem to be very comfortable with the present narrative at the time of writing.

Lastly, a sliver of good news for Americans: Treasury yields are off their recent highs, which could help to spur lending activity and jumpstart a rather stale and inactive housing market.

That’s all for now. If there is anything on your mind regarding stocks, interest rates, or anything else, please feel free to reach out to me. I am always here as a resource for you.

Sincerely,

Joe Ezernack and the Trademark Capital® Team

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