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Tuesday was a day of attrition for the stock market following a strong, post-election run. The fact that stocks did some backtracking was perhaps no surprise, yet participants were caught a little off guard by the move in the Treasury market that featured a notable jump in yields coming off the Veterans Day holiday.
The 2-yr note yield increased nine basis points to 4.34% and the 10-yr note yield spiked 12 basis points to 4.43%. Those moves put a leash on stocks and tempered some of the animal spirits.
It will be interesting to see if those spirits start spooking market bears again considering yields have come down in the wake of an in-line Consumer Price Index (CPI) for October.
Briefly, total CPI increased 0.2% month-over-month (Briefing.com consensus 0.2%) while core CPI, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus 0.3%). Those increases left total CPI up 2.6% year-over-year, versus 2.4% in September, and core CPI up 3.3%, unchanged from September.
The key takeaway from the report -- and perhaps calming influence -- is the understanding that the shelter index accounted for more than 65% of the total 12-month increase in core CPI, so the market is watering down the headline inflation print as not being as comprehensively inflationary as it seems. The unadjusted change in the all items less shelter index was just 1.3% year-over-year.
With the release of the CPI report, Treasury yields shot lower and equity futures shot higher.
The 2-yr note yield traded down to 4.26% and the 10-yr note yield hit 4.38%. The futures for the major indices, which had been trading with modest losses, quickly pivoted into positive territory.
Currently, the S&P 500 futures are up one point and are trading 0.1% above fair value, the Nasdaq 100 futures are down 17 points and are trading in-line with fair value, and the Dow Jones Industrial Average futures are up 19 points and are trading 0.1% above fair value.
A key to today's trading will be whether the Treasury market can maintain its knee-jerk concession for the state of consumer inflation. Shelter inflation, up 0.4% month-over-month and up 4.9% year-over-year, continues to be quite sticky and has kept core CPI elevated well above the Fed's 2% inflation goal.
While it's nice for the market to exclude this item as a trading catalyst, the fact of the matter is that shelter costs (i.e. housing) are not a factor that consumers can exclude any month. The higher cost is real.
The stock market, of course, is not the economy -- at least not as it exists in real time. It is a reflection of where the market thinks the economy, inflation, and earnings will be going over time, and in that regard, the stock market still likes the idea of what it thinks it will be seeing.
The CPI report is sharing air time with the earnings reports from Cava Group (CAVA), Spotify (SPOT), and Rocket Lab USA (RKLB), all of which have been met with enthusiasm, the news that Charter (CHTR) will be buying Liberty Broadband (LBRDA) in an all-stock transaction, and more appointments for President-elect Trump's administration.
Pete Hegseth has been tapped for the role of Secretary of Defense and Elon Musk and Vivek Ramaswamy have been asked to lead a Department of Government Efficiency that will identify cost-savings actions for the U.S. government. Any recommended spending cuts, though, will need to be approved by Congress.
