U.S. Equity Markets finished Wednesday lower, led by the 1.45% fall in the NASDAQ 100. Markets finished lower, as investor focus shifted from the cooler-than-expected inflation print to retail giant Target’s (TGT) earnings miss. The company also forecasts a significant decline in consumer discretionary spending for the holiday season. Housing saw an 11th straight decline in builder sentiment as the sector continues to reel from the Federal Reserve’s aggressive rate hikes. A Dallas Fed report highlighted the potential for home prices to drop as much as 20% next year due to this year’s sky-high mortgage rates. Meanwhile, investors look forward to this afternoon’s manufacturing figures from the Kansas City and Philadelphia Feds for real-time analysis of economic conditions. The breadcrumb trail is leading us straight out of the inflationary woods. On Tuesday, we received two more economic “breadcrumbs” for inflation. They came in the form of monthly data from the U.S. Bureau of Labour Statistics (“BLS”) and the Federal Reserve Bank of New York. The former released its Producer Price Index (“PPI”) figures for October, while the latter delivered its Empire State Manufacturing Survey for November. Both showed that cost growth is easing. The survey’s numbers appear to have peaked this past spring, while the PPI figures look to have done the same in June. And while a couple of those months may have felt inconsequential, the cumulative effect is becoming noticeable. The larger scope of the change is important for the Federal Reserve. It tells the rate-setting Federal Open Market Committee that its policy changes are having the intended effect on economic data. And as the momentum builds, it will give it room to dial back or even pause the pace of rate increases at some point in the near future. The change will support a steady long-term rally in the S&P 500 Index. But don’t take my word for it, look at what the data is saying. The PPI measures the input costs for manufacturers producing finished goods. When demand for those input materials increases and availability becomes scarce, prices go up. In other words, if a company has to pay more to build its products, it will typically pass those costs along to consumers to maintain profit margins. And the opposite is true when demand falls. The headline PPI number rose 8% year over year (“YOY”) compared with the expectation for an 8.3% gain and the prior month’s downwardly revised 8.4% increase. It also marked the fourth consecutive monthly decline, which is the slowest rate of growth since July of last year. It continues a steady trend lower since March’s peak of 11.7% growth. On a month-over-month (“MOM”) basis, the figures expanded 0.2% compared with the expectation for 0.4% growth and the prior month’s 0.2% increase. On a core basis, the numbers were unchanged compared with the expectation for a 0.3% gain and September’s 0.2% expansion. While the recent slide is positive, we still have room to move lower to reach the post-pandemic average of 5.9% growth and the pre-pandemic average of 1.3%. looking at the latest core PPI reading. This number encompasses all items minus the more volatile swings in energy and food prices. The Fed tends to follow this gauge to understand the underlying price trends. This number showed 6.7% growth compared with the expectation for a 7.2% jump and the prior month’s 7.1% increase. Like the headline number, the core reading still has more room to the downside before it hits the post-pandemic average of 5% and the pre-pandemic average of 1.7%. But October’s result is far below March’s 9.7% reading. The Empire State Manufacturing Survey rebounded slightly but continued to remain below trend for the year. Prices paid is important because it tells us what manufacturers are paying to produce goods. We can think of it relative to the BLS’s Producer Price Index. In the November survey, prices paid increased, meaning manufacturing costs rose. The November prices paid index had a reading of 50.5 compared with October’s 48.6 and April’s all-time high of 86.4. While this was the second straight monthly increase, it is worth noting that September experienced the lowest reading since December 2020. The overall trend still remains lower at the moment compared with the 12-month average of 68.3. Prices received is an equally important reading. This measure tells us what companies are collecting for their finished goods- in other words, what it is costing individuals to buy something. The prices received index came in at 27.2 compared with October’s reading of 22.9 and March’s all-time high of 56.1. While at first glance the increase may raise an eyebrow or two, we must remember October’s reading was the lowest level since January 2021. And this month’s number is still well below the 12-month average of 39.9. As I have said, both measures are leading indicators of the direction of inflation. And as we can see, the readings for prices paid and received have a tendency to peak before or right around the same time as the PPI and CPI. So, the rapid decline we are seeing in producer price growth could begin to materialise in a slowdown for consumer price growth as well. U.S. manufacturing costs were at their weakest point in April 2020 when they slid by 1.5%. Since then, as the economy rebounded from COVID-19 shutdowns, prices shot straight up. But now, with inflation driving interest rates higher and slowing demand, cost growth is starting to ease once more. And the YOY PPI comparisons only grow more difficult from here. Fed Chairman Jerome Powell has told us the central bank wants to see a prolonged slide in inflation growth before easing up on interest-rate hikes. In other words, one or two months is not going to do the trick. But these numbers, and the current trend, certainly lean in the direction of a sustainable drop. We have seen a similar story play out in the CPI and want to see it continue when the BLS releases the next round of results in a month. However, before any policy changes happen, policymakers have said they would first like to see interest rates reach the 4.5% to 4.75% level. So, a sustained move lower in inflation growth should reassure the central bank that its rate hikes are working. That should give the Fed room to slow the pace of rate hikes moving forward. Once the central bank does that, it will support a steady, long-term rally in the S&P 500. Within the S&P 500 Index, nine of the 11 sectors finished lower. European Markets closed in the red. Markets ended lower as nations remain on edge after Poland’s missile strike. The geopolitical uncertainty dampened any gains from carryover momentum on the lower U.S. inflation metrics. Also, the U.K.’s inflation data came in much higher than expected, driven by surging energy and food prices. The European Central Bank’s (“ECB”) Financial Stability Review highlighted the deterioration in economic and financial conditions has increased risks to financial stability in the region. And ECB officials continue to moderate hawkish comments, as Robert Holzmann, a well-known advocate of higher rate hikes, said the bank must be mindful of being too aggressive. In Asia, Markets ended a volatile trading session with mixed results across the region amid rising geopolitical tensions from a deadly missile strike in NATO-member Poland yesterday. China’s new home prices fell again in October, which marked the fastest decline in seven years. Following another negative economic release, spokeswoman Meng Wei from the National Development and Reform Commission – China’s top economic planner – told reporters it will prioritize stabilising the economy. And Japanese machinery orders unexpectedly dropped in September, with manufacturing weaknesses driving the fall. Elsewhere, Oil closed 1.90% lower while Gold closed flat.

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