October CPI Comes In Hotter Than Expected — Morgan Stanley Strategist Says 50-Basis-Point Fed Hike Would Be ‘Too Far’

Prices rose across recreation, medical care, motor vehicle insurance, household furnishings and education.

• Core CPI rose 0.3% in October, above the 0.2% estimate and matching the gains in September and August.
• Shelter costs rose 0.3% and accounted for more than 30% of the monthly increase, while energy price gains slowed to 0.7% from 5.2%.
• Baird Strategas’ Jason Trennert said his firm remains ‘Overweight’ on energy, expecting prices to stay “sticky.”

U.S. Consumer Price Index (CPI) inflation came in hotter than expected, rising 0.4% month over month in October, above economists' estimate of 0.3% but down from September's 0.6% rise, according to the Bureau of Labor Statistics (BLS). 

Core consumer prices, which exclude volatile food and energy costs, increased 0.3% in October, above the 0.2% consensus estimate and matching the increases recorded in September and August. 

In an interview with CNBC, Morgan Stanley's global head of macro strategy, Matthew Hornbach, said the reading could have implications for Federal Reserve policy. 

Morgan Stanley Strategist On 50-Basis-Point Fed Hike

Hornbach said the October report and the next two readings were expected to be among the year's most favorable because of residual seasonal patterns that government adjustments have not fully corrected. 

With inflation proving stronger than anticipated, he questioned how many more elevated readings the Fed would tolerate before accelerating its tightening cycle. However, when asked about the possibility of a 50-basis-point rate hike, Hornbach said, “To my mind, that's taking it too far.” 

Hornbach said the more immediate question was whether the Fed would move from quarterly 25-basis-point hikes to raising rates at consecutive meetings.

Shelter, Food Prices Drive Inflation, Energy Costs Rise Slowly

Prices rose across recreation, medical care, motor vehicle insurance, household furnishings and education, while used vehicles and communication were among the few major categories to register declines.

Shelter costs rose 0.3%, accounting for more than 30% of October's overall monthly inflation increase. Food prices climbed 0.5%, with grocery prices rising 0.4% and food away from home increasing 0.5%. Energy prices advanced 0.7%, a substantial slowdown from September's 5.2% surge.

US Stock Futures Fall

U.S. Stock futures fell as traders reacted to higher-than-expected October inflation and Federal Reserve Governor Waller hinting at the possibility of a 50-basis-point rise in rates next month.

Futures tied to the S&P 500 index were down 0.5%, while those linked to the Dow Jones Industrial Average were flat. Nasdaq-100 futures slipped 1.2%. 

On Stocktwits, retail sentiment toward the SPDR S&P 500 ETF (SPY) and SPDR Dow Jones Industrial Average ETF Trust (DIA) was in ‘bullish’ territory over the past day, while sentiment toward the Invesco QQQ Trust (QQQ) remained in the ‘neutral’ zone.

Energy Prices Could Remain Elevated

Jason Trennert, Baird Strategas' Chairman and CEO, said he would examine the breadth of price increases across CPI components, cautioning that “at a certain point, you know, a supply shock becomes a normal state of affairs.”

While acknowledging the recent decline in crude oil prices, Trennert noted that “they're still significantly higher than they were a year ago.” 

He also pointed to disruptions in global refining capacity, suggesting that crude prices could decline while refined petroleum products remain elevated. Trennert said his firm remained overweight the energy sector because “we think that prices are going to be sticky there.”

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