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Markets take Republican midterm losses in stride with inflation in retreat

The “red trickle” on Election Day did cause investors to pull back somewhat from equity markets, but better-than-expected inflation data released Thursday spurred one of the best rallies in the past two years.

MANHATTAN (CN) — Inflation data that show prices finally stabilizing brought welcome cheer to Wall Street this week before it could even properly mourn the midterms election results.

On Thursday, investors were gifted a rare treat: headline inflation came in under analyst forecasts. According to the Bureau of Labor Statistics, headline inflation picked up just 0.4% in October, compared with the 0.6% many had expected. Over the past 12 months, the inflation index has increased 7.7%, the smallest yearlong increase since January.

Equity futures rocked up within seconds of the report. Compounding moderate gains from earlier in the week, the Dow Jones Industrial Average gaining 800 points before the morning bell. By the finale of trading on Thursday — equity markets are open on Veterans Day, but bond markets are closed — the Dow picked up even more speed, gaining 1,198 for the day and 1,309 points since last week’s closing bell.

The S&P 500 and Nasdaq, both of which have had more tepid gains due to troubles among some technology companies, also ended up in positive territory for the week, gaining 185 points and 639 points, respectively, since last Friday.   

Most of the price increases in October were due to gains in energy, which picked up 1.8% last month after three months of price declines, and more specifically the 19.8% increase in fuel oil prices. Shelter and transportation prices also continued to increase, both by 0.8% in October.

Meanwhile, medical care prices fell for the first time since the middle of 2021, while used car prices dropped for the fourth consecutive month. The price index for all items, excluding food and energy, rose 0.3% after it had gained double that percentage rate in September and August.

“Finally, some good news for the economic outlook,” said Bill Adams, chief economist at Comerica Bank. “If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller. Equity index futures are anticipating big gains this morning after yesterday’s crypto-induced selloff.”

Experts now believe the Federal Reserve will keep its final rate hike of the year, expected in mid-December, at no higher than 50 basis points. If the central bank were to increase the federal funds interest rate by that amount, it would settle at the 4.25% to 4.5% range by the end of the year.

Paul Ashworth, chief North America economist, said the 0.3% increase in core consumer prices last month won’t be enough to persuade the Fed to drop its overall hawkish stance. “But we expect this to mark the start of a much longer disinflationary trend that we think will convince the Fed to halt its tightening cycle early next year, with the policy rate peaking at 4.5% to 4.75%, and to begin cutting rates again before the end of 2023,” he wrote in an investor’s note.

On Wednesday, the outlook for Wall Street looked a little worse, after investors were awaiting election results that would determine which party controlled the Senate and House of Representatives. The promise of a “red wave” of Republicans taking control of both congressional bodies never materialized, but ultimately the result will probably please markets overall.

Tom Essaye of the Sevens Report wrote in an investors’ note that, “while it’s clear expectations of substantial Republican gains proved false, the net result for markets is the same: a split government.” Essaye attributed the minor losses on Wednesday to markets “unwind[ing] some of the split-government rally of the past several days.”

Even more concerning to investors, perhaps, was the imposing of crypto markets after the turmoil in that market the day before. Among the many crytocurrencies that plunged Tuesdat, Bitcoin fell about 779 points. Cryptos have since stabilized.

Some data points remain concerning for Wall Street, improving inflation notwithstanding. Earlier in the week, the National Federation of Independent Business’ small business optimism index fell nearly 1 point to 91.3, the 10th consecutive month the index has fallen below its 49-year average.

Just under half of small business owners reported in October that job openings were hard to fill, unchanged from the previous month, while exactly half of owners say they raised average selling prices.

“Owners continue to show a dismal view about future sales growth and business conditions, but are still looking to hire new workers,” Bill Dunkelberg, the group’s chief economist, said in a statement. “Inflation, supply-chain disruptions, and labor shortages continue to limit the ability of many small businesses to meet the demand for their products and services.”

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