Is U.S. inflation easing?

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the latest U.S. inflation numbers as well as market implications of the recent U.S. midterm elections.

Markets rise as U.S. inflation slows

Antal-Gilbert opened the conversation with a look at the U.S. consumer price index (CPI) report for October, which showed inflation rising at the slowest pace since January. Ristuben said that headline inflation increased by 7.7% last month on a year-over-year basis, while core inflation - which strips out prices from the volatile food and energy sectors - rose by 6.3% year-over-year. On a monthly basis, headline inflation climbed by 0.4%, while core inflation ticked up by 0.3%, he added.

"The month-over-month gains were about two-tenths of a percentage point lower than expected, and this led to a very positive reaction in markets," Ristuben stated, explaining that markets have spent most of the year fretting over when the U.S. Federal Reserve might start getting inflation under control. October’s lower-than-anticipated rise in consumer prices led to speculation that inflationary pressures may be starting to decline, he said, resulting in significant market gains the day the report was released. Case-in-point: the S&P 500® Index shot up by 5.5% on 10 November, Ristuben said, while the Nasdaq Composite Index climbed 7.4% the same day.

"Just as important, the yield on the benchmark 10-year U.S. Treasury note fell by about 28 basis points on 10 November, while the U.S. dollar weakened," he noted, adding that in his opinion, the market reaction was probably a bit premature.

"It’s important to remember that October’s inflation numbers, while lower than in previous months, are still intolerably high," Ristuben explained. He said that some of the biggest relief in price pressures came from the durable goods sector, but that inflation remains sticky in other areas. In particular, wage inflation is still running very hot, at a level of around 6%, Ristuben noted.

Overall, while last month’s numbers do show that some progress is being made toward reining in inflation, he cautioned against reading too much into the data. "At the end of the day, I think it’s a little bit too early to spike the ball in the end zone and declare any kind of victory yet," Ristuben remarked.

Is gridlock in Washington good news for markets?

Shifting to the results of the recent U.S. midterms, Ristuben said that ballots are still being counted in a few key House of Representatives and Senate races. Focusing in on the House, he said that while the lower chamber has not officially come under Republican Party control yet, it appears very likely that the GOP will win enough seats to secure a majority. However, that majority is unlikely to be as big as was expected heading into Election Night, Ristuben added.

Meanwhile, control of the Senate is unlikely to be known until December, he said, noting that races in three states - Arizona, Nevada and Georgia - haven’t been called yet. Either the Democratic Party or the Republican Party will need to win two of these three races in order to take control of the Senate, Ristuben explained, adding that the Georgia contest is headed for a runoff election on 6 December.

"The reality here is that neither political party is going to have a major majority in the Senate or the House, and with the House probably going to the Republicans, the U.S. is going to have a split government. That’s likely going to result in gridlock, as it will be harder for Congress to get things done," he stated. Ristuben explained that markets typically prefer gridlock, because it provides more of a certainty that new bills or sweeping policy changes, for instance, are unlikely to be passed. "Markets like certainty - even if the certainty is that nothing will get done. At the end of the day, from a market perspective, that’s usually a pretty welcome message," he concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.