Yields have turned down in recent weeks for a variety of reasons. This week’s October U.S. CPI report was well behaved, with headline inflation slowing to 3.2% y/y, core inflation ebbing to 4.0% y/y, and the ‘supercore’ (services ex-energy and housing) cooling to 3.7% y/y. More importantly, the month-to-month annualized increases in both core and supercore were below the 3% mark, a welcome improvement from some high readings in recent months. Indeed, given current underlying inflation trends, it looks like the Fed will be on hold, which was further reflected in media chatter and market pricing this week.
Meantime, oil prices have also been under pressure amid global demand concerns and rising supply, with WTI now sitting almost $20 below the September high—that’s even more income inflation relief right there.
But, on a less positive note, the fourth quarter economic growth picture is shaping up to be much softer than the blowout near-5% print seen in Q3. Indeed, this week’s data largely confirmed that view. Retail sales dipped 0.2% in October; industrial production fell 0.7% with factory output down; and homebuilder confidence slid further in November to near pandemic-era lows on weak buyer traffic. So, yields falling because inflation is cooling—good news. Yields falling because growth is struggling—not good news. Equity investors leaned more toward the former this week.