Market Minute: Disinflationary Trends Remain Intact

Inflation risks have diminished but have not disappeared. The S&P 500 fell slightly after the September inflation report, closing -0.2% below Wednesday’s record-high closing level. The year-over-year headline inflation rate slowed to 2.4% from 2.5%, a tick higher than expected. Nonetheless, it represents the lowest reading since February 2021. The news on core inflation was less positive. The figure grew by 3.3% on a year-over-year basis, inching up from 3.2% in August. Despite high housing and food prices holding on, year-over-year shelter inflation continued to moderate to 4.9%, down from 5.2% last month. This is a positive sign, yet housing remains a big contributor to inflation. The equity market may have interpreted the core inflation print as a bit troublesome considering it's the first time since March 2023 that core inflation has neither declined nor stayed flat.

Equity markets have continued to march higher in October despite a more volatile start to the month. Long duration Treasury yields such as 10’s and 30’s have risen since September 18th, which may signify either resilience in the U.S. economy, or slightly higher inflation expectations. Forward-looking inflation indicators suggest that further progress toward the Fed’s 2% inflation target is likely in 2025, and the Treasury yield curve has steepened as the Fed is on path to lower short-term rates. Irrespective of inflation figures for September coming in somewhat higher than expected, the main risk for the economy is slower activity in the labor market.