Why investors shouldn’t worry about today’s inflation data

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Written on Oct 10, 2024

Reading time 3 minutes

Bureau of Labour Statistics says inflation was up more than expected in September.
The US Federal Reserve is still broadly expected to cut rates by 25-bps in November.
Goldman Sachs sees continued rally in the S&P 500 index to 6,000 level by year end.

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US stocks are in the red this morning after the Bureau of Labour Statistics said inflation was up more than expected in September.

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The consumer price index came in up 0.2% for the month and 2.4% for the year versus 0.1% and 2.3% expected.

The equities market is responding negatively to today’s print primarily on concerns that it may push the Federal Reserve into abstaining from cutting rates any further in 2024.

Still, Ian Lyngen – the head of US rates strategy at BMO Capital Markets says the data this morning actually “reinforced our expectations for a 25-basis point cut in November”.

What are the chances of a 25-bps Fed rate cut in November?

The CME Group’s FedWatch tool seems to agree with BMO. It also pegs the probability of a 25-bps rate cut in November at 94% – up from 75% before the CPI report on Thursday.

Part of the reason why markets remain convinced that the central bank will further lower its key interest rate is because the shelter inflation is pulling back.

“The big picture is inflation continues to pull lower, albeit with some bumps along the way,” Sonu Varghese of Carson Group told clients today.

Interest rate cuts are broadly seen as positive for the stock market as they make bonds and saving accounts less attractive, thereby pushing investors to chase risk-on assets like equities in pursuit of higher returns.

The benchmark S&P 500 index is currently up a whopping 22% versus the start of 2024.

Payrolls data trumps inflation report for Federal Reserve

Investors should not be overly concerned with the hotter-than-expected inflation report today also because a more important data point for the Federal Reserve is the payrolls release, as per Whitney Watson of Goldman Sachs.

On Thursday, the initial unemployment claims came in at 258,000 – well above the 231,000 expected and 225,000 previously.

The data reiterated the need for further rate cuts as the last time jobless claims stood at such an elevated level was in August of 2023.

Goldman Sachs, therefore, remains bullish on the S&P 500. In September, the investment firm even raised its year-end target on the benchmark index to 6,000 signaling potential for another 4.0% upside from here.

“Trajectory of growth is a more important driver for stocks than the speed of rate cuts. Resilient economic growth should lead to modestly higher bond yields while continued earnings growth drives modestly higher equity prices,” David Kostin, its head of US equity told clients at the time.