Inflation Eases as Big Tech Makes Roster Cuts
The release of Thursday's October consumer price index (CPI) seemed to be the catalyst to the biggest one-day stock market gain in over two years. Though the muddy midterm results ate into the early gains, stocks rallied again on Friday to close out an exceptional week.
Expectations were for the year-over-year number to decline from 8.2% to 8.0%, with the range of forecasted outcomes from 7.8% to 8.1%. Everyone expected CPI to decline, but no one was expecting it to drop from 8.2% in September to 7.7% in October. That was all the markets needed to have their best day in well over two years. The S&P 500 climbed over 5% in one day and the Dow soared over 1,200 points.
While there is hope that this moderation will steady the Fed's hand for future rate hikes, core inflation (6.3%) still far exceeds their stated 2% target rate. Prices declined in used cars (-2.4%), healthcare services (-0.6%), and many other smaller contributors, but still rose in pivotal places. Shelter costs - which make up a third of the CPI - found the highest monthly rise in 22 years (+0.8%). Improvement in larger contributing areas must emerge if inflation is to make greater strides in the right direction
The tech industry responded to a poor third quarter with over 35,000 layoffs across 72 companies. Though Twitter dominated much of the discourse for its incredibly public downward spiral, Meta and Amazon made up a bulk of the cuts with 11,000 and 10,000, respectively. If the latest earnings reports signaled a sobering end to a period of seemingly unlimited growth in the sector, this has certainly punctuated it. Statements by many companies tried to quiet alarms by framing these cuts as simple course corrections. The hirings and tech usage that surged in 2020 are coming back to earth as offline life has picked back up. As with previous tech layoffs, Bay Area residents will be impacted more than most.
Midterms maintain the status quo
The inflation data quelled what looked like a strong negative market reaction to the election. Inflation remained a high priority for voters, but the response to other concerns and unprecedented youth turnout washed away the much-hyped "red wave". Democrats retained control of the Senate but Republicans are still expected to come away with a narrow margin for control of the House.
The election was far from the referendum on the administration that many were hoping for. As tempting as it may be to view this outcome as an affirmation of the administration, it is a bipartisan feeling that the country is not on the right track.
Key issues we faced going into this election season still remain and addressing them will be less straightforward with a balanced government. Many economists and market watchers still expect a recession in 2023, with the odds rising that one hits sooner rather than later. A gridlock may hamstring efforts to ameliorate its effect on the working class or to address the underlying issues that have brought us here.
Expect some turbulence ahead as higher rates, layoffs, and lower earnings continue to rear their heads. Markets have historically rallied following midterm elections and seem poised to do just that with these results. A divided government limits legislative action, affording the markets greater security from policy and regulatory risk.
- It’s hard to imagine any data matching the importance of last week's. A nationwide election and a softening inflation reading were a lot for markets to take in. We will hopefully see further improvement in inflation with the producer price index (PPI), which measures the prices for people who make the stuff we buy. The latest PPI numbers will be released Tuesday.
- Federal Reserve speakers are scheduled all week. It will definitely be interesting to see what their reactions might be in response to October inflation readings.
- Third-quarter earnings continue, with nearly 1,100 companies reporting this week. As earnings wind down, it’s important to note that they have been mostly better than expected with some high-profile misses. But between the Fed announcement, the election and the lower-than-expected inflation reading, earnings have been lost in the shuffle this month.
- Other data points of interest this week will be retail sales, business inventories and mortgage applications (Today), housing starts and permits (Thursday) and existing home sales and leading indicators (Friday). These numbers bear watching, since mortgage rates are hovering near 7%, and we continue to see a swift decline in the housing market.