Why investors shouldn’t sweat this inflation report

The latest inflation report came in slightly hotter than expected, knocking stock prices lower. But there are some encouraging signs within it. The consumer price index rose by 0.2% in September on a month-over-month basis and 2.4% from the year-earlier period . Economists polled by Dow Jones had forecast expected a 0.1% gain month over month and 2.3% increase year over year. Core CPI, which strips out food and energy, also was more than expected. Some investors worried the report means the Federal Reserve may not be able to cut rates further. But the odds of a quarter-point Fed rate cut in November actually rose after the report came out. Per the CME Group’s FedWatch tool, the fed funds futures market indicated a 94% probability of a quarter-point rate cut next month. That’s up from about 75%. The chances of the Fed holding rates at current levels lowered to about 5% from 24%. “CPI Inflation data was slightly on the hotter side, with commodity prices (outside) energy rising more than expected. The good news is that shelter inflation is pulling back and that’s going to pull inflation lower. The big picture is inflation continues to pull lower, albeit with some bumps along the way,” Carson Group global macro strategist Sonu Varghese said. Goldman Sachs Asset Management’s Whitney Watson also noted that the labor market “remains in the driving seat for the Fed and we see next month’s payrolls release as the more important data point in determining the pace and extent of Fed easing.” Investors received fresh labor market data Thursday as well, with initial jobless claims jumping by 33,000 to 258,000. That’s the highest claims level since August 2023 and should signal to the Fed that it needs to stay the course with rate cuts. Ian Lyngen of BMO Capital Markets said that, “On net, this morning’s data reinforces our expectations for a 25 bp cut in November.” Elsewhere on Wall Street this morning, JPMorgan downgraded Honeywell to neutral from overweight. “We like the defensive growth profile of the company with extended visibility tied to the long cycle backlog and a renewed focus on growth under the new CEO, and we applaud action here, with a constructive top line outlook for ’25,” analyst Stephen Tusa wrote. “However, our concern is that a refreshed focus on organic growth, which we expect to pay off somewhat in 2025, may not fall to the bottom line as expected, with a trade-off that is balanced against margins,” he added.