US Stocks Rally as Inflation Cools, But Data Quirks Fuel Debate
November CPI rose a less-than-expected 2.7%, boosting Fed pivot hopes, yet statistical anomalies from a prior government shutdown have some investors urging caution.
U.S. stocks surged and Treasury yields fell Tuesday after a cooler-than-expected inflation report bolstered investor hopes that the Federal Reserve may be positioned to cut interest rates sooner than anticipated.
The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 2.7% in the year through November, a significant deceleration and well below the 3.0% to 3.1% consensus economist forecast. The promising news was reinforced by the core CPI measure, which excludes volatile food and energy prices, showing an annual increase of just 2.6%, its lowest reading since early 2021.
The initial market reaction to the headline numbers was decisively bullish. S&P 500 futures jumped in pre-market trading and major indices opened higher, as investors increased bets on a policy pivot from the central bank. Yields on the benchmark 10-year Treasury note dipped as bond traders priced in a higher probability of rate reductions in the first half of the coming year.
However, the encouraging data comes with a significant asterisk that has left some market participants skeptical. The reading was impacted by a U.S. government shutdown in October, which, according to the Bureau of Labor Statistics, prevented the agency from collecting survey data for that month. As a result, official month-over-month figures for November were not provided, clouding the true pace of disinflation.
Analysts have pointed out that the November report's integrity is complicated by the statistical noise. With no official October change to measure against, the year-over-year figure is based on imputed data. Some investors, as noted by the Wall Street Journal, are therefore treating the report with caution, suggesting it's too 'noisy' to be a reliable signal for an imminent rate cut. This skepticism is sharpened by the fact that the report's calculation involved an assumed zero inflation for October’s owner’s equivalent rent, a major component of the index.
Despite these data integrity concerns, the overall trend points toward moderating price pressures that have plagued the post-pandemic economy. The softer-than-expected print will nonetheless factor into the Federal Reserve's calculus at its upcoming policy meetings. The central bank has held rates at a multi-decade high as it works to bring inflation back to its 2% target, and officials have stressed a 'data-dependent' approach.
For now, the market's optimism appears to be winning the day. The cooling headline inflation provides a powerful narrative for those anticipating a less hawkish Fed. Still, many economists and investors believe a clearer picture will only emerge with the December CPI report, which should be free of the shutdown-related statistical distortions. Until then, the debate between the headline data and its underlying complexities will continue to shape market sentiment.