Let’s Fit the Narrative to the Desired Outcome

When this morning’s economic reports offered divergent implications for the Fed’s dual mandate, traders – bond traders in particular – chose the one that offered the narrative they preferred.

CPI inflation data is among any month’s most anticipated reports. From the FOMC’s viewpoint it takes a backseat to the PCE Core Deflator, but it is widely followed and has broad ramifications for the economy, nonetheless. The September data was released this morning, and it was unpleasant. The monthly readings for both headline and core came in 0.1% above expectations, at 0.2% and 0.3% respectively. Those were unchanged from last month, but the consensus expectations were for drops of -0.1% for each. Someone might assert that an unchanged CPI rate indicates that prices are stable, but remember, that means prices are rising at a stable rate, not remaining stable. The past three Core readings of 0.3%, 0.3% and 0.2% also means that 3-month annualized Core CPI is 3.2%. That’s above 2%, last I checked.

But if the stable prices portion of the mandate didn’t deliver, the maximum employment portion did. Weekly initial jobless claims rose to 258,000, above the 230k consensus and last month’s 225k. There are some who asserted that this week’s number might have been pushed higher by delayed claims coming from the areas affected by Hurricane Helene, but there was not enough granularity in the data to prove or disprove that idea. This was a time when skepticism took a back seat to desire.

We saw 2-year Treasury yields drop by 5bp in the aftermath of the reports, and they stayed lower throughout the morning. Stocks sold off a little after the report, with the S&P 500 (SPX) trading about -0.4% lower, but there was no follow-through. After a couple of days of rallies, one might have expected some profit-taking, especially since both data points were economically unfriendly. Instead, after meandering at lower levels, SPX turned modestly positive shortly after noon. Buying dips and chasing momentum remain key factors.

It is typically very important for investors and traders to maintain flexible mindsets. Events can change rapidly, so it is crucial that we adapt to shifts in underlying facts and sentiment. But it is not always as useful to fit one’s trading to the desired outcome. It can work when one can ride a trend, but trends have a way of changing unpredictably. For now, we can get away with cherry-picking the news we like that fits our preferred narrative. In the long-run, that can be a dangerous game.