This challenges the position of Fed Chair Jerome Powell and other dovish members of the Federal Open Market Committee (FOMC), who delivered a 50 basis point rate cut last month amid concerns about a slowing economy. Yardeni strategists note their credibility has been weakened, especially after the latest jobs report showed a further drop in the unemployment rate and record-high payrolls.
“Today’s CPI data support our story that the Fed shouldn’t cut the federal funds rate (FFR) at its two remaining meetings this year,” strategists said in a Thursday note.
Bond market signals appear to align with this outlook. Since the Fed’s 50-basis-point rate cut on September 18, the 10-year Treasury yield has climbed from 3.63% to 4.11%, reflecting rising inflation expectations.
Stocks, meanwhile, have only slightly dipped from the new record highs reached yesterday. Yardeni believes that any further rate cuts “would increase the odds of a stock-market melt-up.”
The research firm highlighted several key data points from the latest CPI report, explaining why the Fed may need to halt its dovish shift.
In late 2022, Fed Chair Jerome Powell stressed the importance of supercore inflation (core services inflation excluding housing) in predicting future core inflation trends. Thursday’s CPI report showed that supercore CPI inflation has inched up from 4.3% to 4.4% year-over-year, a “far cry from ‘mission accomplished’,” Yardeni says.
Transportation services, a significant driver of services inflation, also saw a sharp rise from 7.9% to 8.5% year-over-year in September. This category includes car leases, rentals, auto maintenance, insurance, and public transit. Strategists said the rising costs, particularly in auto insurance, which has surged 16.3% year-over-year, are hitting lower-income households the hardest.
Moreover, shelter inflation, which was expected to ease, remains a concern as recent increases in three-month annualized rates point to lingering pressures despite slowing rent price hikes.
Energy inflation dropped 6.8% year-over-year in September, and CPI goods fell 1.3%. However, Yardeni strategists warn that geopolitical risks in oil and a weaker dollar could push headline inflation higher toward year-end.
As well, unemployment claims spiked to 258,000 in the week ending October 5, largely due to strikes and severe weather. Continuing claims also rose by 35,000 to 1.861 million.
Yardeni also points out that layoffs by automaker Stellantis (NYSE:STLA) in Michigan, tied to the United Auto Workers negotiations, and hurricane-related claims in North Carolina and Florida are likely to distort upcoming employment reports for October.
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