Key Takeaways From October’s U.S. Inflation Reports

Transcript

hello everyone and welcome to market weeken review for the week ending November 15th 2024 my name is Bon Lyn I am an investment strategist here at Russell Investments today the three things I want to talk about are the US inflation data and a quick update on the Australian labor market as well as talk about what it means when us large cap equities are hovering near all-time highs and how investors should think about the situation so let's start by talking about the latest US inflation data and this week we got two types of inflation data we got both the Consumer Price Index as well as the producer price index data so the Consumer Price Index data came in exactly in line with consensus expectations core CPI came in at 3.3% year over year or 0.3% month over month now it's it is important to note that even though core inflation CPI rates are lower than they were during the 2022 2023 time frame they're still not all the way down to 2% just yet meanwhile on the producer price index side of things those price pressures came came in a little bit hotter than consensus expectations in terms of the inflation measure that the FED focuses on that comes out towards the end of the month and that measure is known as core pce core pce uses data that's available in both the CPI and PPI reports so when we put those two CPI and PPI reports together the implications for the fed's prefer third measure of core inflation would suggest that core inflation probably is still a little bit above the fed's 2% Target as of October but once again core inflation rates have come down quite substantially from their 2022 2023 Peak and as we look ahead into 2025 we think that core inflation will eventually get back to the fed's 2% Target but these inflation reports that we got this month show that the path towards disinflation isn't always going to be a linear one and there could still be some months where we have a little bit of a pause in that disinflation progress all right moving across the ocean to Australia so this week we got a labor market report from Australia and job creation did come in a little bit below consensus expectations it came in at around 166,000 consensus was looking for 25,000 jobs but overall the Australian labor market still looks relatively healthy the unemployment rate stands at 4.1% yes that's above the pandemic era low but when you look at the overall historical context that 4.1% number is still relatively low we also got an update on Australian wage pressures this month and what we saw was that wage pressures in the third quarter moderated compared to the second quarter and also came in somewhat softer than expected so even though the Reserve Bank of Australia the Australian Central Bank hasn't begun its rate cutting process just yet we think that these developments on the labor market front are encourag in in terms of suggesting that the RBA might be able to begin its rate cutting process in the near future either towards the end of this year or early into 2025 finally I want to touch on what it means when us large cap equities are hovering near all-time highs we saw that the SMP 500 once again broke through its all-time high record earlier this week and I know that for some investors out there when they see those type of headlines they might be a little bit hesitant and they might be wondering should I consider underweighting equities and our answer is we do not think that this is a time to underweight equities yes it is true that on most Equity valuation measures us large cap equities look somewhat overbought and yes it is true that from a sentiment perspective us equities us large cap equities also look somewhat overbought but the thing is there is something called an equity risk premium and the equity risk premium means that in the long run investors generally get compensated for allocating to equities for taking on the risk associated with investing in stocks and so when we look at what's going on in the markets right now even though we do see some headwinds for equities from here on in we don't think that the markets have gotten to an unsustainable extreme just yet and our philosophy is that unless we see markets at an unsustainable extreme we don't think investors should make large tactical tilts so instead what we would say is we think investors might benefit from just rebalancing back to that strategic asset allocation to help preserve some of the gains in their Equity portfolio that's all the time we have this week thank you so much for tuning in and we will see you next time here on Market weekend review hi I'm Sophie anel head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

U.S. consumer-price increases during October matched consensus expectations
The latest snapshot suggests a relatively healthy Australian labor market
The S&P 500 Index hit another record high

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin examined the U.S. inflation numbers from October as well as the state of the Australian labor market. He also discussed what the recent strength in U.S. large cap equities might mean for investors.

The latest on U.S. inflation

Lin began with a look at two recently released U.S. inflation reports: the consumer price index (CPI) and the producer price index (PPI). Starting with the CPI, he said that the October numbers matched consensus expectations, with the core CPI rising 3.3% year-over-year and 0.3% month-over-month.

“Importantly, even though core inflation CPI rates are significantly lower now than in the 2022-23 timeframe, they’re not all the way down to the U.S. Federal Reserve’s (Fed) target rate of 2% just yet,” Lin remarked. On the producer side of things, he said that the PPI for October came in a bit hotter than consensus expectations.

Lin noted that the Fed’s preferred inflation gauge—the core PCE (personal consumption expenditures) price index—will be released on Nov. 27. This measure incorporates data from both the CPI and PPI reports, he explained. “Putting these two latest reports together suggests that the core PCE reading for October will likely come in still above the central bank’s 2% target,” he remarked.

Looking ahead to 2025, Lin said he thinks core inflation will eventually return to 2%, but noted that the path toward disinflation isn’t always going to be linear. “Just like we saw with the October numbers, there could be some months in the year ahead where the disinflation trend pauses for a bit,” he stated.

When could the Reserve Bank of Australia begin cutting rates?

Shifting to Australia, Lin said that job growth during October came in slightly under consensus expectations, with approximately 16,000 jobs added last month—compared to projections for 25,000 new positions. Overall, however, the Australian labor market still looks relatively healthy, he said, noting that the country’s unemployment rate stands at 4.1%.

“While this is above the recent low of 3.5% seen in June 2023, in a historical context, 4.1% is still a relatively low unemployment rate,” Lin stressed. He noted that wage pressures also moderated during the third quarter in comparison to the second quarter and were somewhat softer than anticipated.

So, what could all of this mean for potential Reserve Bank of Australia (RBA) rate cuts? Lin said that while the central bank hasn’t started easing just yet, these latest developments suggest that the rate-cutting process might begin in the near future. “I think the RBA could start lowering rates either later this year or in early 2025,” he remarked.

S&P 500 sets another record high

Lin finished by noting that U.S. large cap equities have once again been hovering near all-time highs, with the S&P 500 Index establishing a new closing record of 6,001 on Nov. 11 before dropping slightly later in the week.

With the benchmark index repeatedly setting new highs this year, Lin said it’s only natural for some investors to wonder if a pullback could be around the corner—and if they should consider underweighting U.S. equities in their portfolios. However, he stressed that he doesn’t believe now is an appropriate time to do so.

“It’s true that on most equity valuation measures, U.S. large cap equities look somewhat overbought—and it’s also true that they appear somewhat overbought from a sentiment perspective too. But I think it’s important for investors to remember the equity risk premium—the idea that in the long run, investors are generally compensated for taking on the risks associated with investing in stocks,” Lin said. He noted that although he sees some headwinds for equities from here on out, he doesn’t think that U.S. markets have reached an unsustainable extreme just yet.

“At Russell Investments, our philosophy is that unless markets reach this level, we don’t think investors should make large tactical tilts in their portfolios. Instead, in light of today’s market environment, we think investors might benefit from just rebalancing back to their strategic asset allocations in order to help preserve some of the gains in their equity portfolios,” Lin concluded.

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Key Takeaways From October’s U.S. Inflation Reports | Russell Investments

The latest on U.S. inflation

When could the Reserve Bank of Australia begin cutting rates?

S&P 500 sets another record high