SE - Wall Street Lunch: October CPI Data Comes In Soft

2023-11-14 12:03:00 ET

Summary

• Headline CPI flat in October vs. forecast for a 0.1% rise.
• YouTube to make video makers disclose altered or synthetic content, including AI videos.
• Check out BofA's list of top 10 most and least shorted stocks by hedge funds.

Listen below or on the go on Apple Podcasts and Spotify

Stocks jump, yields sink on tame retail inflation report. (0:15) Traders now see first interest rate cut in May . (2:00) YouTube to require disclosure on AI video. (3:54)

This is an abridged transcript of the podcast.

Our top story so far

It’s the end of an era, as far as the markets are concerned.

Soft retail inflation numbers for October cemented the belief of investors that the Federal Reserve was done raising rates following an unprecedented tightening cycle.

Stocks soared, while Treasury yields and the dollar tumbled as data continues to support the possibility of a soft landing for the U.S. economy—something many thought would be beyond Fed Chairman Jerome Powell and company.

"The Fed can’t take their victory lap yet, but Chair Powell has to be smiling today," Michigan economist Betsey Stevenson tweeted.

The headline CPI was flat last month compared with the forecast for a 0.1% rise. The annual inflation rate fell to 3.2%. The core CPI, excluding food and energy, rose 0.2%, tamer than the 0.3% rise predicted. The core CPI rate dipped to 4%, still double the Fed’s inflation target.

Janney's Guy LeBas notes that "healthcare costs were the biggest long-run swing factor. Health (insurance) pricing in CPI gets reset only 1x/yr, and it looks like it was on the more moderate side."

"That'll echo all the way to late 2024, which has policy implications," he adds.

Wells Fargo economists say they “do not see the latest data as a game-changer for inflation's path ahead.”

“With inflation in October held down by volatile components like gasoline, travel services, and autos, we expect inflation's return to 2% will continue to be a slow grind.”

But while economists expressed caution on the all-clear, the market reaction was swift and decisive.

Stocks are in full rally mode, led by the growth-heavy Nasdaq (COMP.IND), up +2.2% as rates dropped. The S&P ( SP500 ) is up +2%, and the Dow ( DJI ) is up +1.5%.

The 10-year Treasury yield ( US10Y ) tumbled more than 15 basis points to around 4.5%. The 2-year (US2Y), more closely tied to the Fed benchmark, dropped below 4.9%.

Pantheon Macro's Ian Shepherdson calls today's report "the (almost) final nail in the coffin of the Fed’s rate hike optionality."

The odds for the December Fed meeting shifted from a 15% chance of a hike to a near certainty of no move. And the first rate cut was brought forward to May.

Pantheon's Shepherdson adds that it "would now take a horrific CPI report for November and likely a big rebound in payrolls too, in order to trigger a final hike... the combination of a full reversal of pandemic-driven supply-side problems and the likely moderation in demand growth means that the conditions for sustained disinflation are in place."

Among active stocks

Home Depot ( HD ) topped estimates on both lines of its Q3 earnings report. Comparable sales were down 3.1% year over year during the quarter vs. the consensus expectation of -3.3%.

Average ticket fell -0.3% to $89.35, while sales per retail square foot were down -3.7% to $595.71. Customer transactions were down 2.4%. Comparable sales in the U.S. fell -3.5% vs. -3.7% consensus.

Sea Limited ( SE ) tumbled after mixed third-quarter results . Net loss narrowed to about $144 million, compared to a net loss of $569.28 million in the prior-year period. But the Singapore-based tech giant, which operates the e-commerce platform Shopee, had a net income of $331 million in the second quarter of 2023.

And Canadian Solar ( CSIQ ) missed expectations for Q3 GAAP earnings and revenue . It also guided Q4 revenue below expectations. Q3 net income fell to $0.32 a share from $1.12 per share in the year-earlier quarter. Revenue slipped to $1.85 billion from $1.93 billion a year ago, which the company said reflected lower project sales and a lower module average selling price.

In other news of note

YouTube will soon require video makers to disclose when they have created altered or synthetic content that is realistic, including videos created using AI tools .

YouTube said that over the coming months it will introduce updates that inform viewers when the content they are seeing is synthetic.

For example, it could be an AI-generated video that realistically depicts an event that never happened or content showing someone saying or doing something they did not actually do.

"This is especially important in cases where the content discusses sensitive topics, such as elections, ongoing conflicts and public health crises, or public officials," said Jennifer Flannery O’Connor and Emily Moxley, the vice presidents of product management.

And in the Wall Street Research Corner

The BofA equity team is out with its report on fund positioning and screened for the most and least shorted stocks .

They estimate that 85% of total short interest in stocks is from hedge funds.

They screened the S&P 500 based on fund positioning data through the end of September.

Ralph Lauren ( RL ) is the most shorted stock, with 12.8% of its float held short. It’s followed by Paramount Global ( PARA ) and SolarEdge (SEDG).

Philip Morris International ( PM ) is the least shorted stock at 0.39% of the float. Mastercard ( MA ) and Motorola ( MSI ) are also up there.

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