The October CPI data fell far short of expectations. Is that a good thing?

In full view, one of the important data that determined the Federal Reserve's last interest rate hike at the end of the year, the US CPI data for October was in full swing.

The 7.7% year-on-year increase was lower than the 7.9% expected by the market. It also hit a new low since February this year, meaning that the CPI fell to its low before the Russian-Ukrainian conflict. At the same time, it rose 0.4% month-on-month, which was also better than the 0.6% expected by the market.
Among them, the “core CPI” excluding energy and food increased 6.3% year over year, better than market expectations of 6.5%, and lower than 6.6% last month.

Why is the market so fearful and expected to grow so high?
On the one hand, oil prices rebounded in October; on the other hand, housing, the core project with the highest share, showed an upward trend in June-September.
But in fact, the market is somewhat overestimating the impact of high-weight projects.

From a month-on-month perspective, energy prices in October were actually higher than in September, and they also rose again after falling since July, soOil prices did “increase” the CPI increase in October.

However, although food prices are also higher than in September (month-on-month increase),The month-on-month growth rate was the lowest this yearThat's a good sign, indeed. Since food is more important than energy in the overall CPI, the parts outside the core of the October CPI should be “better than expected.”

In the core projectShelters (shelters), which account for the largest share, increased 0.8% month-on-month and 6.9% year-on-year, which is also the highest level in recent years, and is the strongest factor supporting CPI this quarter.

Among other segments, only the growth of new cars and transportation services surpassed the core CPI, and the month-on-month increase in new cars also hit a new low this year.All other service projects were to varying degrees lower than the increase in core CPI.

What does a CPI below market expectations mean?
First, the decline in CPI exceeded expectations.It has reduced the firm belief that the Federal Reserve will raise interest rates to a certain extentThe market also thinks the same. Currently, judging from CME's interest rate observation tool, the 50 basis points and 75 basis points of interest rate hikes in December before the CPI was announced were five or five basis points, and the probability of 50 basis points after the announcement rose to over 80%.

With the exception of December, lower-than-expected CPI would give the Federal Reserve a better basis for the “decline” in interest rate hikes in 2023It is also possible to lower the end point of interest rate hikes or slow down the rate hike process.This is all good news for the stock market.

Second, the drop in CPI gave the Biden administration and the Democratic Party a better chance (but not necessarily good news for the stock market).Although voting has ended in the midterm elections, the Democratic Party's performance has also surpassed expectations. It did not give the Republican Party a big win (Red Wave) (which is not good for the stock market), and it is very likely that it will continue to control the Senate, but the Biden administration's polls may pick up a bit, although it is not expected that he will introduce more policies favorable to the stock market.

Most importantly, the current CPI has shown fatigue from rising prices.Housing accounts for one-third of the CPI, and rent is more than one-fifth of it.In such a large country, rent drives its nose, and the level of rent is closely related to the interest rate set by the Federal Reserve.

The higher the interest rate, the higher the mortgage interest rate, and people have to rent a house and push up the rent. This also seems to be telling the Federal Reserve: At present, there are only a few factors that support the increase in CPI, that is, it personally used interest rates to push up.

Although the unemployment rate in October was still at an all-time low of 3.7%, it also showed an increase. Whether the unemployment rate will continue to rise in the future is difficult to say. But right now, big tech companies are laying off workers, manufacturing companies (mostly automobiles) are also laying off workers, banks are also laying off workers... Maybe in a few more months, Americans will not be able to afford such high rents, and the decline in CPI may come faster than expected by the market.

Is the next sharp drop in CPI good news?

No, that means the recession is actually here!