Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way). Sets stage for inflation to "fall like a rock" rest of year

Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year
Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year
Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year

The Oct CPI report is better than appears at first glance. And we think this is supportive of stocks continuing to rally into year-end, albeit with the risk of some eventual pause as flagged by Mark Newton.

  • The reason is that the Core CPI MoM of +0.28% is distorted by a puzzling 30% annualized surge in used car prices. The 2 largest contributors to the rise in Core CPI MoM:
    – Shelter +0.17% cont. to growth (CTG)
    – Used cars +0.06% CTG
  • We all know used car prices are falling. In fact, they are down 3% YoY per CPI. But somehow the monthly rise was +2.72%, or 30% annualized. Does anyone believe this?
  • Nope. This distortion will disappear next month. As we highlighted in the past, Used car CPI tends to lag Manheim wholesale used car prices by 2 months. Thus, set to tank.
  • Shelter is cooling to 5% YoY from 5.1% YoY and needs to eventually get to 4% YoY to be closer to CPI target.
  • The odds of a Dec cut surged from 55% to 82%. The reason is the bond market realizes this Core CPI of +0.28% should be really +0.22% MoM, or basically at Fed target. The 6bp subtraction is taking out the used car distortion.
  • We think this is supportive of stocks near term.
  • The next focus will be Oct retail sales Friday. That is probably set to be “soft” which is bullish for stocks.
  • Keep buying the dips.

Bottom line: Stay on target into year-end

Thus, we see positive supports for equities into year-end. As we noted earlier this week:

  • the median gain post-election AND
  • given no recession AND markets declined
  • is 7%, implying S&P 500 6,300 or so

That said, we see more upside for other groups. This holds whether looking at 2016, or whether thinking of a dovish Fed. The drivers are:

  • de-regulation
  • drop in cost of capital for businesses
  • general “animal spirits” given Republican White House and Senate

This favors the following groups:

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Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year

Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year

Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year

Oct Core CPI +0.28% MoM distorted by 30% rise in used car prices (ummm...no way).  Sets stage for inflation to fall like a rock rest of year

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