October CPI may solidify case for a terminal rate above 5%: What to know this week

A fresh government inflation reading and U.S. midterm elections are the most highly anticipated events on Wall Street’s radar this week as investors continue to digest the Fed’s latest interest rate decision.

Thursday morning will bring traders the closely-watched Consumer Price Index (CPI) for October. Economists surveyed by Bloomberg see headline CPI at an annual 7.9% for the month, a moderation from September’s year-over-year increase of 8.2%. Core CPI, which strips out the volatile food and energy components of the measure, is projected to come in at 6.5%, little changed from 6.6% last month.

Stocks, meanwhile, may also take their cue from this year’s midterm election outcome on Tuesday. All three major indexes closed higher Friday but lower for the week on the heels of October employment data, a rush of subpar earnings reports, and another supersize rate increase from the Federal Reserve that came with assertions of more hikes ahead.

In the five days ended Friday, the Dow Jones Industrial Average fell 1.5%, the S&P 500 3.3%, and the Nasdaq Composite 5.7% — the tech-heavy index’s worst weekly performance since January as mega-caps Apple (AAPL), Amazon.com (AMZN), and Alphabet (GOOGL) each lost more than 10% after third-quarter financials disappointed Wall Street.

The U.S. economy added 261,000 jobs in October, another robust hiring figure seen as confirmation to policymakers that the labor conditions can weather a further ramp up in the Fed’s key interest rate to fight historic inflation. The central bank delivered a fourth consecutive interest rate hike of 75 basis points while hinting at a slower pace of hiking but a higher final terminal rate.

Investors were hoping for signals from the central bank on a potential easing in monetary plans, which would serve as a tailwind for the major indexes after they closed last month higher on expectations of a policy pivot. But Powell pushed back against the notion that a shift in the Fed’s path is imminent, with inflation and payrolls still elevated.

“Restoring price stability will likely require maintaining a restrictive stance of policy for some time,” he said in prepared remarks following Wednesday’s policy announcement. “Recent inflation data have again come in higher than expected.”

Federal Reserve Board Chairman Jerome Powell holds a news conference after Powell announced the Fed raised interest rates by three-quarters of a percentage point as part of their continuing efforts to combat inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz — Federal Reserve Board Chairman Jerome Powell holds a news conference in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz

A wave of Wall Street strategists have lifted their expectations for how high the Federal Reserve will raise its key interest rate after Wednesday’s “slower but higher” messaging from Powell — and October’s CPI this week may affirm the revised forecasts, while offering investors clues about the size of December’s increase.

Goldman Sachs was the first among big banks in the days leading up to November’s FOMC meeting to warn rates may rise as high as 5% by March 2023.

TD Securities lifted its terminal rate forecast from a range of 4.75%-5.00% to 5.25%-5.50% and sees a 50 basis point hike at the next meeting Dec. 13-14. BNP Paribas expects a fifth 75-basis-point increase next month and a terminal fed funds level of 5.25% in the first quarter of next year.

After Friday’s jobs report, economists at Bank of America upwardly revised their projections to a terminal rate of 5.0-5.25% from 4.75-5.0% and anticipates a 50 basis point increase for December.

“We think risks to our revised FOMC rate path continue to lie to the upside and upcoming prints on CPI inflation and the November employment report will weigh heavily on the near-term path for Fed policy,” strategists led by Michael Gapen said in a Friday note.

On Tuesday, Wall Street will tune in to see which party controls the legislative branch of government and several gubernatorial seats in what could be the first midterm election since 2006 where the majority party in the House and Senate — Democrats, in this case — lose their grip on control.

Elections have generally brought volatility to the market in the near term but relative calm in the three months that follow, Abhishek Gupta and Román Mendoza of MSCI Research wrote in a recent note.

“Focusing on midterms, historically the broader U.S. equity market has, on average, reacted positively to the reigning political party’s ability to retain its position in both chambers of Congress,” they wrote. “A flip in control has led to uncertainty around the ability of the president’s party to pass bills and influence regulations, leading to enhanced volatility on a relative basis.”

People attend a campaign in support of Democratic U.S. senatorial candidate John Fetterman and Democratic nominee for Pennsylvania governor Josh Shapiro, in Philadelphia, Pennsylvania, U.S., November 5, 2022. REUTERS/Hannah Beier

On the corporate side, earnings season continues to carry on into its final stretch. Of the 85% S&P 500 companies that have reported actual results for the third-quarter so far, 70% have reported earnings per share above estimates, below the 5-year average of 77% and the 10-year average of 73%, per FactSet Research. And of those with figures above expectations, the average beat was only 1.9% higher than forecast, sharply lower than the 5-year average of 8.7% and 10-year average of 6.5%.

If the 1.9% is the final percentage beat for the quarter, it will be the second-lowest upside earnings surprise surprise average for companies in the index in the past nine years.

Earnings headliners this week include Activision Blizzard (ATVI), BioNTech (BNTX), Lyft (LYFT), Walt Disney (DIS), and Rivian Automotive (RIVN).

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Economic Calendar

Monday: Consumer Credit, September ($30.000 billion, $32.241 billion)

Tuesday: NFIB Small Business Optimism, October (91.3 expected, 92.1 during prior month)

Wednesday: MBA Mortgage Applications, week ended Nov. 4 (-0.8% during prior week); Wholesale Trade Sales, month-over-month, September (0.4% expected, 0.1% during prior month); Wholesale Inventories, month-over-month, September Final (0.8% expected, 0.8% during prior month)

Thursday: Consumer Price Index, month-over-month, October (0.6% expected, 0.4% during prior month); CPI excluding Food and Energy, month-over-month, October (0.5% expected, 0.6% during prior month); Consumer Price Index, year-over-year, October (7.9% expected, 8.2% during prior month); CPI excluding Food and Energy, year-over-year, October (6.5% expected, 6.6% during prior month); CPI Index NSA, October (298.572 expected, 296.808 during prior month); CPI Core Index SA, October (300.094 expected, 298.660 during prior month); Real Average Hourly Earnings, year-over-year, October (-3.0% during prior month); Real Average Weekly Earnings, year-over-year, October (-3.8% during prior month); Initial Jobless Claims, week ended Nov. 5 (220,000 expected, 217,000 during prior week); Continuing Claims, week ended Oct. 29 (1.500 million expected, 1.485 during prior week); Monthly Budget Statement, October (-$95.0 billion expected, -$429.7 billion during prior month)

Friday: University of Michigan Consumer Sentiment, November Preliminary (59.5 expected, 59.9 during prior month); U. of Mich. Current Conditions, November Preliminary (63.4 expected, 65.6 during prior month); U. of Mich. Expectations, November Preliminary (54.5 expected, 56.2 during prior month); U. of Mich. 1 Year Inflation, November Preliminary (5.1% expected, 5.0% during prior month); U. of Mich. 5-10 year Inflation, November Preliminary (2.9% expected, 2.9% during prior month)

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Earnings Calendar

Monday: Activision Blizzard (ATVI), BioNTech (BNTX), Choice Hotels (CHH), Groupon (GRPN), Lyft (LYFT), Mosaic (MOS), Plantir Technologies (PLTR), Take-Two Interactive Software (TTWO), TripAdvisor (TRIP)

Tuesday: Affirm (AFRM), Allbirds (BIRD), AMC Entertainment (AMC), Constellation Energy (CEG), Coty (COTY), DuPont (DD), GoodRX (GDRX), Lemonade (LMD), Lordstown Motors (RIDE), Lucid Group (LCID), News Corp. (NWSA), Norwegian Cruise Line (NCLH), Novavax (NVAX), Occidental Petroleum (OXY), Planet Fitness (PLNT), Upstart (UPST), Walt Disney (DIS), Wynn Resorts (WYNN)

Wednesday: AppLovin (APP), Beyond Meat (BYND), Bumble (BMBL), Canopy Growth (CGC), Hilton Grand Vacations (HGV), iRobot (IRBT), Rivian Automotive (RIVN), Roblox (RBLX), SeaWorld Entertainment (SEAS), Starwood Property Trust (STWD), Signify Health (SGFY), Unity Software (U), Wendy’s (WEN), ZipRecruiter (ZIP)

Thursday: AstraZeneca (AZN), Brookfield Asset Management (BAM), Compass (COMP), Dillard’s (DDS), Honest Company (HNST), LegalZoom.com (LZ), Nio (NIO), Poshmark (POSH), Ralph Lauren (RL), Six Flags (SIX), Tapestry (TPR), Toast (TOST), Utz Brands (UTZ), Warby Parker (WRBY), WeWork (WE)