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Economic Data Deluge

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Two key economic reads greet us this morning, the Initial and Continuing Jobless Claims (which usually come out each Thursday morning, but have moved a day earlier due to the Veteran’s Day holiday tomorrow) and the Consumer Price Index (CPI) for October, which follows yesterday’s Producer Price Index (PPI) read. Together these represent a very good “real time” look at inflation in the economy.

The CPI read was hot enough to set off a few alarms on Wall Street: a +0.9% spike in consumer prices is 30 basis points higher than expected and more than double September’s headline +0.4%. Stripping out volatile food & energy prices, known as the “core” read, we see +0.6% — 20 basis points ahead of expectations and triple the +0.2% we saw in September. Inflation, anyone?

Year-over-year headline CPI reached +6.2% in October, ahead of the +5.9% expected, and the highest we’ve seen on this metric in 31 years. We’re also seeing year-over-year CPI reads per month at +5% or hotter for the past five straight months. Year-over-year core comes in at +4.6%, also very hot and the biggest figure we’ve seen since July 1991.

We know the Fed is beginning to taper its asset purchases per month by $15 billion per, starting here in November. At this rate, it will bring us to mid-2022 before this accommodative policy will be brought to $0; at that point, it is largely assumed the Fed will start raising interest rates from their current 0-0.25%. The question now becomes — and a bit more urgently stated than previously — does the Fed need to recalibrate this program so that inflation does not overwhelm the economy?

If that happens, there is a further risk of the market bringing forth another “taper tantrum,” such as the one seen back in 2013 when current Fed Chair Jay Powell first came to the Federal Open Market Committee under Chair Ben Bernanke: after months and months of inaction of tapering down the Fed’s Quantitative Easing (QE) program (which was developed to fight the Great Recession of the late period of the previous decade), the Fed moved to bring the program to an end. Market participants reacted negatively, to put it kindly.

Obviously, Powell does not want to see a repeat of this. But he has also been patient that current inflation metrics are supply-based, largely pinpointed on microchip shortages from Asia — and that these are temporary economic conditions. The word he has used all year is “transitory,” though the half-year of steadily heating inflation we’re currently experiencing would test the meaning of that term — but what if the Fed realizes it needs to move faster? Would they need to risk a new taper tantrum regardless?

Market futures were in the red a bit before CPI numbers hit the tape this morning, and they slipped a bit further before modulating here a half-hour ahead of the opening bell. Of course, we’re off near all-time record highs across the major indexes, but heating inflation may change enough attitudes among investors to take us out of out latest Goldilocks phase. Watch this space.

Initial Jobless Claims reached a new post-Covid low this morning, albeit tepidly, to 267K last week. This was higher than the 260K consensus estimate, but still lower than the upwardly revised 271K the previous week, which initially was its own low-mark on new jobless claims since the pandemic began. Continuing Claims rose from the precious week’s post-Covid low — 2.16 million versus the revised 2.10 million. Still, as we approach sub-2 million, it brings us closer to where we were in 2019 and very early 2020, which was ver near full employment.

It would be easy to overthink things in our current market, but early-session trading has been admirably cool thus far. We are embarking on a taper program, and eventually we will be raising interest rates, which is a potent weapon to fight inflation. Whether we are moving at the right pace is still an open question, but Powell — or, if he is not reinstated as Fed Chair next term, whomever replaces him — still has his hands on the steering wheel.