Market 11/14: Strong short squeeze after October CPI report

October CPI surprisingly lower than expected, core index lowest in over 2 years

Headline CPI unchanged from previous month: +3.2% Y/Y (lower than forecast +3.3% Y/Y),

Monthly figure 0% M/M (sharply down from September: +0.4% M/M).

Core CPI: +4.0% Y/Y (expected: +4.1%) — lowest since Sep 2021.

Monthly figure +0.2% M/M (lower than estimate: +0.3% M/M).

Core CPI growth over the past 6 months has declined from +5.3% earlier this year to +3.2% currently — even as the economy added +1.9 million jobs.

Confirms the downward trend in inflation.

Super core services CPI (excluding housing costs) up +3.8% Y/Y in October. => this is also the lowest in the past 2 years.

Energy prices down -2.5% M/M due to gasoline prices down -5.0%, overshadowing gains in other energy components.
Food prices up +0.3% in October, after +0.2% in September.

Except for luxury dinners, other restaurant service types are seeing declines → Services CPI expected to decline soon as well.

Notably: housing inflation shows signs of cooling and will soon decline following actual market trends

Housing inflation still accounts for the largest share in core services CPI growth.

Housing prices up 6.7% year-over-year, accounting for over 70% of the total increase in the basket excluding food and energy.

However, housing CPI is merely a lagging indicator of the housing market, actual rents are falling rapidly → Housing CPI likely to continue declining.

Housing CPI has trended down from the previous month along with other CPI indices:

=> Conclusion: CPI still exceeds the 2% target and Fed cannot yet declare victory, but this data is a welcome signal.

Market's positive reaction after CPI report: bond yields down, stocks rally strongly

Bond yields down:

US 10Y Treasury yield down 18 basis points to 4.46% after CPI data, eliminating expectations that Fed will hike rates again in December or later.

However, public debt worth 8.2 trillion USD will mature in the next 12 months, equivalent to 1/3 of the Treasury's total outstanding debt.
On the other hand, next year's budget deficit will also require at least another 2 trillion dollars beyond the 8.2 trillion dollars needing refinancing.

=> With the current bond market, the public debt issue will have a stronger impact than inflation.

Stock rally:

S&P 500 up to 4500, up 400 points from the low less than 3 weeks ago on 10/27.

Market rises across the board from Big cap (Tech, Cyclical Consumer) to Small cap.

Real estate - sector sensitive to interest rates, rises the most because: CPI down means Fed cuts rates soon → mortgage rates down → easier to buy homes → home buying demand picks up again.
In addition, stocks of renewable energy companies - a sector dependent on borrowing to build infrastructure, also rise strongly.

Market expects Fed to cut rates soon:

After CPI news, probability of rate hike at December FOMC meeting drops from 14.5% yesterday to 5%.

In just one day, market changes stance:
… from betting on Fed still hiking rates end of year (left chart) => to Fed will not hike rates + 4 rate cuts in 2024 (right chart).

China: October credit growth continues weak as loan demand remains low

RMB loan growth slows to 10.9% Y/Y, weakest since April 2022 → low long-term investment loan demand from businesses

Government bond sales account for nearly 85% of monthly credit growth, highest share since 2018.

M2 money supply growth unchanged from prior month at 10.3%
M1 money supply growth at only 1.9%

=> Growing M1-M2 divergence signals subdued business activity, households and businesses parking money in savings accounts

China's economic growth losing momentum as:

Consumer demand for entertainment and travel slows in October, consumer confidence declines.
Weak service sector growth, while consumer prices fall into deflation.

Industrial output forecast to rise 4.5% in October Y/Y. Chinese factories showing signs of distress recently.

Read more about crisis alarms in China: here.

US-China dialogue update: China agrees to restrict fentanyl trade

China agrees to restrict companies exporting chemicals used to produce fentanyl at the summit between Joe Biden and Xi Jinping.

Home Depot earnings update

Home Depot reports earnings above estimates but issues bleak outlook as sales slide.

Revenue: $37.71 billion, above $37.6 billion expected, down -3% Y/Y
EPS: $3.81 above $3.76 expected
Operating income: $5.4 billion, down -12% Y/Y

Other news

Moody's Investor Service changes outlook for Washington DC from stable to negative, just days after doing the same for the US.

Boeing receives new order for about 67 jets from Ethiopian Airlines
The owner of The Body Shop has sold this retailer to the private equity firm Aurelius Group.