VIDEO: Irrational Exuberance Over The October CPI Report?

Welcome to my latest video presentation. Below is a condensed transcript; my video contains further details and several charts.

My question for today: Can you trust Wall Street’s CPI-induced bullishness?

The U.S. Bureau of Labor Statistics last Thursday released a cooler-than-expected Consumer Price Index (CPI) report for October, and the data spawned euphoria on Wall Street.

Contrarian investors such as myself are usually skeptical about extreme mood swings. Indeed, some analysts have dismissed last week’s rally as a ridiculous overreaction to the CPI data. But I beg to differ. Sometimes, good news is just…well, good news.

Let’s parse the numbers for clues as to whether the rally has momentum.

Month over month, the headline CPI increased 0.4% versus estimates of 0.6%. The “core” CPI, which excludes the volatile food and energy components, climbed 0.3% compared to expectations of 0.5%.

Over the past 12 months, the all-items CPI increased 7.7% in October, compared to expectations of 7.9%. Core CPI in October came in at 6.3% over the year, compared to expectations of 6.5%. Placed within the context of the last four months, the October CPI reflects a downward trend.

The encouraging news on inflation is tangible and not a mirage. A mending supply chain, slackening consumer demand, and excess retailer inventories are all fueling a pronounced slowdown in goods inflation. At the same time, as the labor market stays tight and wage growth slows, services inflation is stabilizing.

In a separate report last Thursday, the U.S. Department of Labor showed that in the week ending November 5, the advance figure for seasonally adjusted initial claims was 225,000 (versus 220,000 expected), an increase of 7,000 from the previous week’s revised level. Jobs growth remains strong but it’s decelerating, which is disinflationary.

In response to the CPI and jobs data, stocks soared and Treasury yields declined. After a powerful two-day rally Thursday and Friday, the major equity benchmarks closed out the week with hefty gains (see video for charts).

On Thursday alone, the Dow jumped about 1,200 points. The stellar week racked up by stocks is a reminder that the number one story driving equities is inflation and concomitant Federal Reserve policy. As Wall Street starts to expect a less hawkish Fed, the Treasury yield closed last week below 3.9%.

Oil prices fell last week, as China’s strict COVID policies stoked concerns about global economic growth, although on Friday, Beijing announced that it would partially ease quarantine rules.

The price of crude oil hovers below $90 per barrel, despite the latest production curbs announced by OPEC+. Weighing on oil prices are persistent concerns about China’s economy, which just goes to show that the cartel only has so much power over the dynamics of global energy trading.

Saudi Arabia and Russia wanted to punish the Biden administration, by pushing up oil prices just before the midterms. It didn’t work.

As we all know by now, the widely expected “red wave” in the November 8 midterm elections simply didn’t happen. The incumbent Democratic party defied historical precedent, as well as the predictions of most pundits, to put in a shockingly strong showing in House and Senate races. The Democrats also performed well across the board in gubernatorial and other state-level races.

The votes are still being counted and which party gets a majority in the House remains up in the air, but on Saturday night the Democrats clinched Nevada and retained control of the Senate.

The GOP pushed inflation and crime as political issues, but most voters were instead motivated by abortion rights, as well as a general disdain for election deniers.

But remember this: Wall Street doesn’t care all that much about the midterms, regardless of the year. The investment class hates radical change from either the left or right. Gridlock suits Wall Street just fine (although as I explain below, one industry emerged as a big winner in the midterms).

The week ahead…

Here are the major economic reports on the docket this week that have the power to move markets and warrant close attention:

Fed inflation expectations (Monday); producer price index (PPI) and household debt (Tuesday); retail sales, industrial production, and homebuilder’s index (Wednesday); initial jobless claims and housing starts (Thursday); existing home sales and leading economic indicators (Friday).

The most important data, of course, will be the latest PPI reading. If wholesale prices confirm the trend reflected by the CPI, we’ll probably witness another upward catalyst for stocks. Indeed, it was reported November 14 that Goldman Sachs (NYSE: GS) expects a “significant” decline in inflation in 2023.

In the meantime, which industry emerged victorious in the 2022 midterm elections? Marijuana.

Last Tuesday, marijuana won legalization via ballot initiatives in Maryland and Missouri and in five cities in Texas.

New legal markets for marijuana translate into more sales, more profits, and higher share prices for cannabis companies. That’s why I just launched Marijuana Profit Alert. This brand-new service is your guide for making outsized profits from “the green rush.” Click here to learn more.

John Persinos is the editorial director of Investing Daily. You can reach John at:

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