QQQ - Stocks And Bonds Surge Following Soft October CPI: SPIP ETF A Hold

2023-11-14 09:50:01 ET

Summary

• October CPI report misses expectations across the board, with headline and core inflation rates lower than expected.
• Real average hourly earnings increase by 0.8% but remain flat on a year-on-year basis.
• Stock market futures rise, Treasury yields plunge, and the US Dollar Index falls in response to the dovish inflation report.

The October CPI report was a miss across the board. The Headline inflation rate was unchanged, below the +0.1% expectation. Monthly Core CPI was verified at +0.2%, also below the consensus estimate.

On a year-over-year basis, Headline CPI is now up 3.2%, down from 3.7% in the prior look, while Core CPI is +4.0% versus +4.1% in September - both of the Headline and Core rates came in a tenth of a percentage point under economists' expectations.

The 3.2% annual rise in consumer prices is the lowest since this past June as the disinflation story continues to unfold. The YoY Core rate at +4.0% is now the lowest since September 2021.

Meanwhile, real average hourly earnings were +0.8% last month and flat on a year-on-year basis. The so-called "Supercore CPI" (core services ex-housing) fell to +3.8% from year-ago levels. A lagged indicator but key for the Fed, Owners' Equivalent Rent declined to +6.8%, down from its peak north of 8%.

Music to the Doves' Ears: October CPI Weak Across the Board

A Continued Move Lower in Both Headline & Core CPI

Contributions to CPI

Alternate Measures of Inflation Confirmed Sanguine Consumer Price Rise Trends

Stock market futures soared about 1.4% on the news while Treasury yields plunged. The beaten-down small space rose more than 3%, pacing for one of the group's best days of 2023 while the benchmark 10-year note rate (US10Y) dropped 17 basis points to 4.46%, the lowest since September 25. Gold rallied and the US Dollar Index (DXY) fell in the wake of the dovish inflation report.

S&P 500 Rises More Than 1% Following the Dovish CPI Report

Treasury Yields Plunge Post CPI

Today's sharply bullish equity market reaction continues the trend of upside S&P 500 ( SP500 , SPX ) moves post-CPI. Though the September CPI's release last month was met with some selling pressure, the previous five reports featured positive closes in the SPX. Today's 1%-plus gain would be the best since after the February CPI report, according to BofA.

Bullish CPI Reaction Trend Lately

A much better-than-expected CPI report bodes well for the near-term inflation outlook - the CME FedWatch Tool now shows just a 4% chance of an additional Fed rate hike. Traders also price in four cuts by December next year. Clearly, inflation expectations are on the mend. In some immediate Fed Speak, the FOMC's Barkin said there's "real progress" on inflation. With that all in mind, let's dig into how things look in the Treasury inflation-protected securities ((TIPS)) market.

Rate Trades See Scant Chance of Another Hike

Inflation Breakevens Turning Lower Lately

TIPS ETF in the Spotlight

According to the issuer , SPDR® Portfolio TIPS ETF (SPIP) seeks to track the price and yield performance of the Bloomberg U.S. Government Inflation-Linked Bond Index. It is a low-cost exchange-traded fund, or ETF, that seeks to offer exposure to U.S. TIPS. TIPS are securities issued by the U.S. Treasury that are designed to provide inflation protection to investors and hedge against the erosion of purchasing power due to inflation.

SPIP is a moderate-sized fund, with $1.45 billion in assets under management, and its trailing 12-month dividend yield is 4.0%. Its annual expense ratio is very low at just 0.12%. Share price momentum has been very weak in the last 18 months as interest rates have generally risen while the domestic inflation rate has moved lower. It's also considered a somewhat low-risk fund when analyzing price trends. Liquidity is robust, though, with average volume being close to 450k shares and a 30-day median bid/ask spread of just four basis points.

The Technical Take

Following this morning's soft CPI report, it is key to analyze both SPIP and the ratio of SPIP to comparable-term nominal Treasury securities. Doing so helps gauge inflation expectations. Notice in the chart below that SPIP has been rising since the second quarter of this year - suggesting that inflation expectations are creeping up. The good news is that SPIP may have put in a double-top relative to IEF about a month ago. I am inclined to fade this, call it, a 6-month relative rally in SPIP. On the other hand, take a look at the black line below - it's the total return view of SPIP - it has bounced significantly from its double-bottom last month.

Overall, the trends appear mixed, so a hold or neutral rating on the ETF is warranted in my view.

SPIP And SPIP Relative to IEF: Neutral Trends

The Bottom Line

I have a hold rating on SPDR® Portfolio TIPS ETF following today's CPI report. Inflation breakevens and swaps are not doing a whole lot - bouncing between 2.25% and 2.6% as the Fed gets what it wants in terms of ebbing CPI rates.

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