With all of the election news, there was also economic news this week with the release of the October CPI report.
The CPI rose 0.4% in October 2022, while the annual rate now stands at 7.7%. The less volatile median CPI rose 0.5% in October, and the year-over-year median CPI remained at 7%.
The consumer price inflation report was a little better than expected, and investors cheered. It is important to note that price inflation is still going up at a significant pace. It is just going up at a slightly slower pace than before.
Food prices continue to go up. When you go to the grocery store, your prices overall will continue to go higher.
Still, with this mildly good news that price inflation seems to be retreating a little bit, stock investors went wild. The bulls came out in full force, probably expecting that the Fed will stop its tightening sooner rather than later.
The Dow went up by about 1,200 points on the day. This was a monster rally in the face of uncertainty and concerning economic issues.
On the same day that the CPI numbers were released, the bond market went crazy too. But it went crazy in a way that should make the stock bulls feel very uncomfortable.
The yields in the bond market point to even bigger trouble ahead, despite what the Fed might do. Long-term yields plummeted in just one day, while short-term yields stayed around the same.
In other words, the yield curve further inverted from what it already was. The 10-year yield fell 30 basis points to 3.82%. The 3-month yield finished the day at 4.28% on November 10.
There is now a 46 basis point spread between the 10-year yield and the 3-month yield. So while stocks soared on Thursday, the bond market is saying, “Hang on a minute.”
This has recession written all over it, and the Fed isn’t even done tightening yet. Consumer prices are still rising at 7.7% annually according to the government’s own statistics. The Fed will be tightening to get inflation under control (that it created) in the face of an oncoming train in the form of a recession.
If you are still heavily invested in stocks at this point, you should take the gift from Thursday and sell. Stocks are going to have their big up days, but it is going to be more down days in the year ahead.