In the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sophie Antal-Gilbert, Director of AIS Portfolio & Business Consulting, discussed the latest US inflation figures, as well as the implications for the market. from the recent US midterm elections.
Markets rise as US inflation slows
Antal-Gilbert opened the conversation with a look at the US Consumer Price Index (CPI) report for October, which showed inflation rising at the slowest pace since January.
Ristuben said headline inflation rose 7.7% last month year-over-year, while core inflation, which excludes prices in the volatile food and energy sectors, rose 6.3% year-over-year. On a monthly basis, headline inflation rose 0.4%, while core inflation rose 0.3%, he added.
“Month-over-month earnings were about two-tenths of a percentage point lower than expected, and this led to a very positive reaction in the markets,” Ristuben stated, explaining that markets have spent most of the year concerned when the US The US Federal Reserve could begin to rein in inflation.
The smaller-than-anticipated rise in October consumer prices led to speculation that inflation pressures may be starting to ease, it said, leading to significant market gains on the day the report was released. Case in point: The S&P 500 index soared 5.5% on Nov. 10, Ristuben said, while the Nasdaq Composite Index rose 7.4% on the same day.
“Just as importantly, the benchmark 10-year US Treasury note yield fell by around 28 basis points on November 10, while the US dollar weakened,” he noted, adding that, in his opinion, the market reaction was probably a bit premature.
“It is important to remember that the inflation figures for October, although lower than in previous months, are still intolerably high,” Ristuben explained. He said some of the biggest easing in price pressures came from the durable goods sector, but inflation remains stagnant in other areas. In particular, wage inflation remains very high, at a level of around 6%, Ristuben noted.
Overall, while last month’s figures show some progress is being made to rein in inflation, he cautioned against overreading the data. “At the end of the day, I think it’s too early to hit the ball in the end zone and declare any kind of victory,” Ristuben said.
Is the shutdown in Washington good news for the markets?
Turning to the results of the recent US midterm elections, Ristuben said ballots are still being counted in some key elections for the House of Representatives and the Senate. Focusing on the House, he said that while the lower house is not yet officially under the control of the GOP, it seems very likely that the GOP will win enough seats to secure a majority. However, that majority is unlikely to be as large as expected before election night, Ristuben added.
Meanwhile, control of the Senate is unlikely to be known until December, he said, noting that races in three states — Arizona, Nevada and Georgia — have yet to be called. Either the Democratic Party or the Republican Party will need to win two of these three races to take control of the Senate, Ristuben explained, adding that the Georgia race heads to a December 6 runoff election.
“The reality here is that no political party will have a large majority in the Senate or the House, and since the House is likely to go Republican, the US will have a divided government. That is likely to result in a gridlock, as it will be more difficult for Congress to get things done,” he stated.
Ristuben explained that markets often prefer stagnation, because it provides more certainty that new bills or sweeping policy changes, for example, are unlikely to be passed. “Markets like certainty, even if the certainty is that nothing will be done. At the end of the day, from a market perspective, that’s usually a pretty welcome message,” he concluded.
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