To The Moon

October CPI is the most important data this month, which shall partially affected the Feds dotplot.

The YoY rate 7.7% is much lower than the consensus of 7.9%, also a new low since February, which means CPI fell to the level before Russia-Ukraine war. It rose 0.4% MoM, which is also better than market consensus of 0.6%.

Core CPI without energy and food increased 6.3% YoY, better than the market consensus of 6.5% and last month's 6.6%.

Why is the market so scared?

Gas prices rebounded in October, and Shelter cost, the major weight, has an upward acceleration trend since June.

But in fact, the market overscared.

From MoM perspective, energy price in October did rise, after three months' falling, so Oil prices did play an "aggravating" role.

Food price is higher too, but the month-on-month growth rate is the lowest this year, which is indeed a good sign. Since food weights more than energy, the part outside core CPI should be better.

The core part, Shelter, which accounts for the highest proportion, increased by 0.8% month-on-month and 6.9% year-on-year, also the highest level in recent years and the strongest factor supporting CPI in this quarter.

Among other sub-projects, only new cars and transportation services exceeded the core CPI, and the month-on-month growth rate of new cars also hit a new low this year, All other service items are lower than the growth rate of core CPI.The used cars even dropped by 2% month-on-month, only 2% year-on-year.

What does a CPI lower than market expectations mean?

First of all, CPI dropped, has reduced the Fed's possibility of higher interest rates increasing, The market buys too. CME's interest rate observation tool, shows a over 80% of 50bps after release from a 50%.

It is also possible to lower the end point or slow down the process of interest rates increasing. Good news for the stock market.

Second, it gives the Biden and Democrats a chance. Although the mid-term election has ended, the Democrats performance stronger than expected, and highly likely to win the senate. It also help Biden polls pick up a little, although it is not a good news for the stock market.

Most important, this CPI has shown the fatigue of upward price. The proportion of shelter in CPI should reach almost one third, and the rent is more than one fifth. Rent is closely related to the interest rate set by the Federal Reserve.

The higher the interest rate, the higher the mortgage interest rate, and people have to rent a house, pushing up the rent. It also tells the Fed: Look what have you done!

Now, big techs are laying off employees, manufacturing (mainly automobiles) are laying off, and banks are laying off... Not for long, Americans may not be able to afford such high rent, and the decline of CPI may come faster than the market expected.

Is the next sharp drop in CPI good news?

No, that means the recession has come!