Stocks retreated from record levels Thursday after a hotter-than-expected reading on inflation and a spike in layoffs amplified bets that the Federal Reserve would pursue a gradual path in bringing down borrowing costs from a multi-decade high. An accelerating pace of quarterly earnings reports also kept traders on their toes.
Markets started the day with the highly anticipated Consumer Price Index (CPI) report for September, which came in slightly above expectations. Although headline inflation fell for a sixth consecutive month to hit its lowest level since early 2021, the reading topped economists' expectations due to stubborn shelter and food costs.
For the record, annual CPI slowed to 2.4% in September from 2.5% the prior month, according to the Bureau of Labor Statistics. That exceeded economists' forecast for a 2.3% rise in inflation. More importantly, core CPI, which excludes volatile food and energy costs and is considered to be a better indicator of future prices, rose 0.3%. That topped expectations for a 0.2% increase.
The drop in annual inflation was helped by falling energy prices, while core inflation edged up due mostly to sticky costs for shelter, notes Jim Baird, chief investment officer with Plante Moran Financial Advisors. Although inflation hasn't receded rapidly enough to justify an accelerated pace of policy easing, today's upside surprise "doesn't raise serious questions about the underlying disinflationary trend," adds Baird.
Jobless claims spike
Meanwhile, first-time applications for U.S. unemployment benefits rose last week to the highest level in more than a year. Economists were at odds over how to interpret the news. Quincy Krosby, chief global strategist at LPL Financial, said the data indicate a "cooling labor market." However, Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, took a different view.
"The surge in initial claims can be mostly put down to disruption caused by Hurricane Helene, which made landfall late on September 26," Allen wrote in a note to clients. "Ongoing furloughs and strikes at Boeing have probably played a role too. The Fed will probably look through the labor market disruptions due to the storm."
A blowout September jobs report already had market participants frantically recalibrating their bets on how fast the Fed will cut rates. The latest CPI report, while coming in hot, only appeared to affirm expectations for a cut of 25 basis points (bps), or 0.25%, next month.
As of October 10, futures traders assigned an 84% probability to the Federal Open Market Committee (FOMC) reducing the short-term federal funds rate by 25 basis points at the next Fed meeting, up from 68% a week ago. Odds of a 50 basis point cut dropped to 0% from 32% last week, according to CME Group's FedWatch Tool, while chances of the Fed standing pat rose to 16% from 0% a week ago.
With a half-point cut off the table for the time being, rate-sensitive sectors such as real estate and industrials took the brunt of Thursday's selling. That said, every sector except energy and materials finished in the red. At the closing bell, the blue-chip Dow Jones Industrial Average was off 0.1% at 42,454, while the broader S&P 500 fell 0.2% to 5,780. The tech-heavy Nasdaq Composite backtracked less than a tenth of a percent to 18,282.
Pfizer in focus
Pfizer (PFE) stock fell 2.8% after two former executives said they won't help an activist investor campaign against the pharmaceutical giant. Former CEO Ian Read and former CFO Frank D'Amelio defended Pfizer's leadership team from activist fund Starboard Value, which is demanding changes to boost PFE's slumping share price.
"We have decided not to be involved in the efforts of Starboard Value regarding Pfizer," Read and D'Amelio said in a statement. "We are fully supportive of Pfizer Chairman and CEO Albert Bourla, senior management and the board, and we are confident that over time they will deliver shareholder value."
Starboard has amassed a stake worth about $1 billion, according to The Wall Street Journal, and is pressuring the firm to execute a turnaround plan. PFE stock is up about 2% on a price basis so far this year, lagging the broader market by more than 20 percentage points.
Despite the drama, Wall Street remains fairly bullish. Of the 24 analysts covering Pfizer stock tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, four say Buy and 13 have it at Hold. That works out to a consensus recommendation of Buy, albeit with middling conviction.
