The Market Crash and Today's US Economic Data

Today's US economic data -- CPI and Claims -- should help stabilize the Treasury and stock market, based on my analysis of what was behind their plunges in the past few days.

Many commentators are trying to figure out why the Treasury and stock markets plunged over the past few days.  My view is that both reflected a loss of confidence in the Fed's economic/policy forecast, sparked by Fed Chair Powell's imprecise comment about the level of the "neutral" funds rate last week.  The Fed's forecast calls for a slowing in economic growth in response to a gradual tightening of monetary policy over the next couple of years.  Fed Chair Powell's comment was taken by the markets to believe Fed officials don't believe their forecast and think a more aggressive tightening will be needed.  Ironically, today's low September CPI supports the Fed's view that inflation is tame and will remain so -- in line with my view, as well.

The markets need to see evidence that Real GDP Growth is slowing to regain confidence in the Fed's outlook.  In coming weeks, moderate economic data are good, strong data are bad for the stock market.  Today's report on Initial Claims was good from this perspective.  Initial Claims rebounded to 214k, putting it above the 206k September average.  Continuing Claims have stabilized in the past 3 weeks.  Claims are the most important high-frequency indicator of the economy and they need to stabilize to suggest economic growth is moderating toward trend.

The most important part of low 0.1% m/m Sept Core CPI is the sharp slowdown in owners' equivalent rent. The latter may be catching up to news reports of slowing housing rent. A lower trend in OER will hold down inflation ahead.