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Markets surprise in face of disappointing inflation, consumer-confidence data

Decades-high inflation, coupled with plummeting consumer confidence, had little effect on Wall Street, which closed out the week on a the buoy of Biden's infrastructure package.

MANHATTAN (CN) — Investors pulled back slightly from last week’s record highs, as incredibly high inflation and plummeting consumer confidence have furrowed more than a few brows. But it was barely a speed bump on the bull market train.

On Friday, the Dow Jones Industrial Average gained 179 points to settle at 36,100 points — a couple hundred points shy of last week’s record-setting high — while the S&P 500 and Nasdaq both decline slightly for the week, to the tune of 15 points and 11 points, respectively.

The minor pullback came after new data showed super-hot inflation. According to data released on Wednesday by the Bureau of Labor Statistics, core inflation rose in October by 0.9%, the biggest one-month increase since 2008, and has gained 6.2% over the last year, the largest annualized gain since 1990.

The BLS report found that most items leapt in prices, though leading the pack was energy, which has risen 30% year over year. In particular, fuel oil jumped 12.3% month to month while utility gas services leapt up 6.6%. After a reversal in prices in September, used cars and trucks again saw an increase, this time to the tune of 2.5%.

The report's release early Wednesday caused markets to shed most of their gains from earlier in the week, and the bond yield on 10-year Treasuries spiked about 10 basis points. By the closing bell that afternoon, the Dow lost 240 points, the S&P 40 points, and the Nasdaq 264 points.

The data sent a clarion call among experts, many of whom had agreed with the Federal Reserve that inflation was likely just transitory. Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, called the report a “cause for alarm” and noted the central bank may have to move up their target of 2022 for raising interest rates.

“The Fed is already on a path to tapering their bond purchases, and that is something they may need to accelerate as hiking rates sooner rather than later may be their best course of action if they want to stop inflation from getting entrenched,” he said in a statement.

The Federal Reserve has sought a yearly average of 2% inflation before it would start tinkering with rates and its bond-purchasing program, and many at the central bank hold fast to the idea that the spike in inflation is just a temporary blip.

“The baseline outlook for inflation over the three-year projection window reflects the judgment, shared with many outside forecasters, that under appropriate monetary policy, most of the inflation overshoot relative to the longer-run goal of 2% will, in the end, prove to be transitory," Fed Vice Chair Richard Clarida said in a speech on Monday.

Emphasizing, though, that the current overshoot in inflation is much higher than the central bank had anticipated, Clarida adding: “I would not consider a repeat performance next year a policy success.”

Fiscal hawks, who have been saying the Fed has been wrong about transitory inflation, saw the BLS report as another tick closer on the recessionary doomsday clock.

One such, Peter Boockvar of Bleakley Advisory Group, warned the recent numbers don’t even take into account the housing component, which is one of the biggest components of inflation.

“Jay Powell said monetary policy is in a good place," Boockvar said of Federal Reserve chair in an investment note, "and I’ll argue again that it’s in the exact opposite place as taking the Fed balance sheet up by another $500 billion over the next eight moths while keeping rates at zero is the worst place you can possibly be with inflation now running at a 6% rate.

“The world’s debt levels, asset price valuations, and current level of extraordinary low interest rates, including negative ones overseas, [are] just not positioned for a bout of high inflation that we are clearly in,” he added.

Others say the inflation is a side effect of the economic rebound. “The truth is you can’t shut down a $20 trillion economy and not feel some bumps as it restarts, but we are hopeful the supply chain issues will resolve over the coming quarters and inflation should calm down as well,” said Ryan Detrick, chief market strategist for LPL Financial.

Fortunately, markets had some leeway due to a bump on Monday brought about by the passage of the Biden administration’s infrastructure package, which had caused all three U.S. indices to set new high marks.

The $1 trillion bill was heralded by business groups, including the U.S. Chamber of Commerce, which called it proof that “Congress can work together to solve today’s most pressing challenges” and a “major win for America.”

The Chamber has been less enthusiastic about the reconciliation bill still floating around Capitol Hill. In a letter to lawmakers on Wednesday, the group cited the latest inflation data as proof that the legislation is ill-timed. “Given the substantial risk that the proposed reconciliation bill would result in a longer period of higher inflation, Congress should require an assessment of the proposed legislation’s near-term inflationary impact prior to any vote,” the group’s head lobbyist Neil Bradley wrote.

On Friday, investors again were treated to the University of Michigan consumer confidence survey, which preliminarily shows consumer sentiment in November dropping to 66.8 points, the lowest since late 2011. Chief economist Richard Curtin blamed the numbers on escalating inflation and the “growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”

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