The latest inflation report has left investors cautiously hopeful, offering a detailed view of the current economy. Although inflation rose slightly more than expected, there are also some encouraging trends. In September, the consumer price index (CPI) increased by 0.2% from the previous month and 2.4% from the previous year, surpassing forecasts of a 0.1% monthly rise and a 2.3% annual increase. While this suggests inflation isn’t slowing as quickly as hoped, there are positive signs, especially in core inflation measures.
Core CPI, which excludes the more unpredictable categories like food and energy, also came in higher than predicted, raising concerns about the Federal Reserve’s ability to continue with its planned interest rate cuts. This measure, often seen as a better indicator of long-term inflation, has caught the attention of market participants who are counting on further monetary easing.
Despite the slightly higher inflation numbers, the odds of a quarter-point rate cut by the Federal Reserve in November have grown. The CME Group’s FedWatch tool now shows a 94% chance of a 0.25% cut, up from 75% before the report. At the same time, the chances of the Fed keeping rates steady have fallen to just 5%, reflecting a shift in market sentiment. Investors seem confident that, even with mild inflationary pressures, the Fed can still lower rates without fueling more inflation.
Sonu Varghese, global macro strategist at Carson Group, remained cautiously hopeful. He pointed out that the data showed rising prices in non-energy goods, which contributed to the higher-than-expected inflation. However, Varghese also highlighted a positive change in shelter inflation, which is starting to cool down. Since housing has been a big driver of inflation, any relief in this area could suggest broader price relief in the future, supporting the view that while inflation may spike here and there, the overall trend is still downward.
Whitney Watson from Goldman Sachs Asset Management pointed to the labor market as a key factor in the Fed’s next move. Watson suggested that the upcoming October payroll report might influence the Fed’s decision more than the inflation data alone. With the labor market still strong, the Fed may feel comfortable continuing rate cuts. But if there are signs of a significant slowdown, the central bank could reconsider.
Jobless claims might already be hinting at some softening in the labor market. Initial claims went up by 33,000 to 258,000 last Thursday, the highest since August 2023. This could indicate that the job market is cooling, providing more reason for the Fed to proceed with rate cuts without causing wage-driven inflation. Ian Lyngen from BMO Capital Markets agreed, saying the data backs the expectation of a 25-basis-point cut in November, matching the broader market’s view.
The inflation report and overall economic conditions also impacted individual stocks. For example, JPMorgan downgraded Honeywell from “overweight” to “neutral.” Analyst Stephen Tusa acknowledged the company’s strong growth potential, especially with new leadership and a solid project backlog. However, he raised concerns about Honeywell’s renewed focus on organic growth and its possible impact on profit margins. While the company’s long-term outlook for 2025 remains strong, short-term economic uncertainties—especially around inflation and interest rates—pose challenges.
In short, while the latest inflation data showed a small increase, key signs, like easing shelter costs, suggest the Federal Reserve might still be able to lower rates without worsening inflation. The performance of the labor market will likely play a major role in the Fed’s upcoming decisions, with payroll data offering more insight. Meanwhile, companies like Honeywell are facing challenges amid broader economic uncertainties, but investors are hopeful that the Fed can balance inflation control with steady economic growth.
