October CPI May Strengthen Argument for Terminal Rate Above 5%: What You Need to Know This Week

New government inflation reporting and the US midterm elections are the most anticipated events on Wall Street’s radar this week as investors continue to digest The Fed’s latest decision on interest rates.

Thursday morning will bring traders the closely watched Consumer Price Index (CPI) for October. Economists polled by Bloomberg see core CPI at an annualized 7.9% for the month, moderating from September y/y increase of 8.2%. Core CPI, which strips out the volatile food and energy components of the measure, is expected to come in at 6.5 percent, little changed from last month’s 6.6 percent.

Stocks, meanwhile, may also take a cue from this year Tuesday’s midterm election results. All three major indices closed higher Friday but lower for the week on the heels of October employment data, a flurry of below-par earnings reports and another interest rate hike by the Federal Reserve that came with statements further steps forward.

In the five days ended Friday, the Dow Jones Industrial Average fell 1.5%, the S&P 500 fell 3.3% and the Nasdaq Composite fell 5.7% — the tech index’s worst weekly performance since January as Apple (AAPL), Amazon.com (AMZN) and Alphabet (GOOGLE) each lost more than 10% after third-quarter financial data disappointed Wall Street.

The US economy added 261,000 jobs in October, another solid hiring figure seen as confirmation to policymakers that labor conditions can withstand further hikes in the Fed’s key interest rate to fight historic inflation. The central bank led to a fourth consecutive increase in interest rates of 75 basis points, while hinting at a slower hiking pace but a higher bottom line rate.

Investors were hoping for signals from the central bank about a potential easing of monetary plans, which would serve as a tailwind for the major indices after they closed last month higher on expectations of a policy reversal. But Powell pushed back against the idea that a change in the Fed’s path was imminent, with inflation and wages still high.

“Restoring price stability will likely require maintaining restrictive policy for some time,” he said in prepared remarks after Wednesday’s policy announcement. “Latest inflation data again higher than expected.”

Federal Reserve Board Chairman Jerome Powell holds a press conference after Powell announced that the Fed has raised interest rates by three-quarters of a percentage point as part of its continued efforts to fight inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington, U.S., November 2, 2022. REUTERS/Elisabeth Franz

Federal Reserve Board Chairman Jerome Powell holds a news conference in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Franz

A wave of Wall Street strategists raised their expectations for how high the Federal Reserve will raise its key interest rate after a “slower but higher” announcement from Powell on Wednesday — and this week’s October CPI could confirm revised forecasts while offers investors clues about the size of the December hike.

Goldman Sachs was the first among major banks in the days ahead of November’s FOMC meeting to warn that rates could rise to 5% by March 2023.

TD Securities raised its forecast for the final rate from a range of 4.75%-5.00% to 5.25%-5.50% and sees a 50 basis point hike at the next meeting on December 13-14. BNP Paribas expects a fifth increase of 75 basis points next month and a level of fully funded funds of 5.25% in the first quarter of next year.

After Friday’s jobs report, Bank of America economists revised upward their forecasts to a final rate of 5.0-5.25% from 4.75-5.0% and expect a 50 basis point hike in December.

“We think risks to our revised FOMC rate remain on the upside, and upcoming CPI inflation prints and the November jobs report will weigh heavily on the Fed’s near-term policy path,” said strategists led by Michael Gapen, on Friday Note.

Wall Street will tune in Tuesday to see which party controls the legislative branch of government and several gubernatorial seats in what could be the first midterm elections since 2006 where the party with majorities in the House and Senate — in this case the Democrats – are losing their grip on control.

The election overall has led to market volatility in the short term, but relative calm over the next three months, Abhishek Gupta and Roman Mendoza of MSCI Research wrote in a recent note.

“Focusing on the midterms, the broader U.S. stock market has historically responded on average positively to the ability of the governing political party to retain its position in both houses of Congress,” they wrote. “The change in control has created uncertainty about the president’s party’s ability to pass bills and influence regulations, leading to increased volatility on a relative basis.”

People attend a campaign rally in support of Democratic U.S. senatorial candidate John Fetterman and Pennsylvania Democratic gubernatorial nominee Josh Shapiro in Philadelphia, Pennsylvania, U.S., November 5, 2022. REUTERS/Hannah Bier

People attend a campaign rally in support of Democratic U.S. senatorial candidate John Fetterman and Pennsylvania Democratic gubernatorial nominee Josh Shapiro in Philadelphia, Pennsylvania, U.S., November 5, 2022. REUTERS/Hannah Bier

From a corporate perspective, earnings season is in its final stages. Of the 85% of S&P 500 companies that have reported actual third-quarter results so far, 70% have reported earnings per share above estimates, below the 5-year average of 77% and the 10-year average of 73%, according to FactSet Research. And of those with numbers above expectations, the average hit was just 1.9% higher than forecast, sharply lower than the 5-year average of 8.7% and the 10-year average of 6.5%.

If 1.9% is the final percentage beat for the quarter, it would be the second-lowest average earnings surprise for companies in the index over the past nine years.

This week’s top earners include Activision Blizzard (ATVI), BioNTech (BNTX), Elevator (ELEVATOR), Walt Disney (DIS), and Rivian Automotive (RIVN).

Economic calendar

monday: Consumer creditSeptember ($30.000 billion, $32.241 billion)

Tuesday: NFIB Small Business OptimismOctober (expected 91.3, 92.1 in previous month)

Wednesday: MBA mortgage applicationsweek ended November 4 (-0.8% in previous week); Wholesale Salesmonth over month, September (0.4% expected, 0.1% in previous month); Wholesale inventorymonth-on-month, final September (0.8% expected, 0.8% in previous month)

Thursday: Consumer Price Indexmonth over month, October (0.6% expected, 0.4% in previous month); CPI excluding food and energy, month-on-month, October (0.5% expected, 0.6% in the previous month); Consumer Price Indexy/y, October (7.9% expected, 8.2% in previous month); CPI excluding food and energyy/y, October (6.5% expected, 6.6% in previous month); CPI index NSAOctober (298,572 expected, 296,808 in previous month); CPI Core Index SAOctober (300,094 expected, 298,660 in previous month); Real Average Hourly Earningss, year over year, October (-3.0% in the previous month); Actual Average Weekly Earningson an annual basis, October (-3.8% in the previous month); Initial unemployment claimsweek ended Nov. 5 (220,000 expected, 217,000 in previous week); Continuing Claimsweek ended Oct. 29 (1.500 million expected, 1.485 in previous week); Monthly budget reportOctober ($-95.0 billion expected, -$429.7 billion in previous month)

friday: University of Michigan Consumer Sentimentpreliminary November (59.5 expected, 59.9 in the previous month); U. of Mich. Current Termspreliminary data for November (63.4 expected, 65.6 in the previous month); U. of Mich. ExpectationsNovember Preliminary data (54.5 expected, 56.2 in the previous month); U. of Mich. 1-year inflationNovember Preliminary data (5.1% expected, 5.0% in the previous month); U. of Mich. 5-10 year inflationPreliminary November (2.9% expected, 2.9% in the previous month)

Income calendar

Monday: Activision Blizzard (ATVI), BioNTech (BNTX), Choice Hotels (CHH), Groupon (GRPN), Elevator (ELEVATOR), mosaic (MOS), Plantir Technologies (PLTR), Take-Two interactive software (TWO), TripAdvisor (TRAVEL)

Tuesday: I confirm (AFRM), Allbirds (A BIRD), AMC Entertainment (AMC), constellation energy (CEG), Koti (COTY), DuPont (DD), GoodRX (GDRX), Lemonade (LMD), Lordstown Motors (RIDING), Lucid Group (LCID), News Corp. (NWSA), Norwegian Cruise Line (NCLH), Novavax (NVAX), Occidental Petroleum (OXY), Planet Fitness (PLNT), Upstart (UPST), Walt Disney (DIS), Wynn Resorts (WYNN)

Wednesday: AppLovin (APPENDIX), Beyond Meat (BYND), Bumble (BMBL), canopy growth (CGC), Hilton Grand Vacations (heavy goods vehicle), iRobot (IRBT), Rivian Automotive (RIVN), Roblox (RBLX), SeaWorld Entertainment (THE SEA), Starwood Property Trust (STWD), So health (SGFY), Unity software (U), Wendy (WEN), ZipRecruiter (ZIP)

Thursday: AstraZeneca (AZN), Brookfield Asset Management (BAM), Compass (COMP), Dillard’s (DDS), Honest Company (HNST), LegalZoom.com (LZ), Nio (NIO), poshmarka (POST OFFICE), Ralph Lauren (RL), Six Flags (SIX), tapestries (TPR), Toast (TOAST), Utz Brands (UTZ), Warby Parker (WRBY), We are working (WE)

friday: Range of brands (SPB)

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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