Stocks followed a strong start to the session with something of a whimper as a comforting reading on consumer price inflation only confirmed market participants’ rate-cut bets. The red-hot tech sector was mixed, while energy names outperformed amid a stronger dollar.
The main event of the day was the release of the October Consumer Price Index (CPI) report. Happily for market participants, the inflation data didn’t disappoint – although prices continued to rise for select goods and services.
For the record, October CPI increased 0.2% month over month, according to the U.S. Bureau of Labor Statistics, or the same rate seen in each of the previous three months. The reading matched economists’ expectations.
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Core CPI, which excludes food and energy costs and is considered a better indicator of future prices, also matched estimates. The gauge increased 0.3% in October, or the same rate seen in August and September. Annual core CPI advanced 3.3% to meet the consensus estimate.
“Bang in-line core inflation leaves the Fed on track to cut rates in December,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. “After a run of unseasonably hot autumn data, today’s number cools fears of an imminent slowdown in the pace of rate cuts. Still, with uncertainty over fiscal and trade policies high, there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in.”
Rate cuts in focus
The inline reading on consumer price inflation keeps the Federal Reserve on track for a gradual pace of interest rate cuts, experts say, but details from the CPI report give some market participants pause about the future course of monetary policy. Among the unknowns experts cite are the ways in which a series of proposed tariffs could contribute to inflationary pressures.
“Market participants are breathing a sigh of relief in response to this morning’s key inflation report,” writes José Torres, senior economist at Interactive Brokers. “October’s CPI arrived exactly as anticipated, causing rate watchers to dial up the probability of another quarter-point Fed trim in December. Sticky price pressure expectations aren’t interfering with the enthusiasm of the Trump trade, with cyclical stocks, value sectors and bitcoin outperforming today.”
As of November 13, futures traders assigned an 82% probability to the Federal Open Market Committee (FOMC) cutting the short-term federal funds rate by 25 basis points (bps), or 0.25%, at the next Fed meeting. That was up from 59% a day ago, according to CME Group’s FedWatch Tool. Odds of the Fed standing pat fell to 18% from 41% the previous session.
At the closing bell, the blue chip Dow Jones Industrial Average added 0.1% to 43,958, while the broader S&P 500 was essentially flat at 5,985. The tech-heavy Nasdaq Composite fell 0.3% to 19,230.
Stocks on the move
Spotify Technology (SPOT) stock rallied 11.4% after the music streaming service came up short of revenue and earnings estimates for its third quarter but issued a strong profit and user forecast for its fourth quarter.
Spotify also said its monthly active users (MAUs) came in at 640 million, representing an increase of 11.5% from the year-ago period and 2.2% from the prior quarter. Premium subscribers totaled 252 million, up 11.5% year over year and 2.4% quarter over quarter. Analysts had forecast MAUs of 639 million.
For the fourth quarter, Spotify said it expects to achieve total MAUs of 665 million, total premium subscribers of 260 million, total revenue of 4.1 billion euros and operating income of 481 million euros. Analysts were anticipating monthly active users of 659.3 million, revenue of 4.26 billion euros and operating income of 432.7 million euros.
Cava Group (CAVA) stock rose 1.6% after the fast-casual Mediterranean restaurant chain reported a top- and bottom-line beat for its third quarter and raised its full-year outlook.
Cava Group has been red hot on the price charts in 2024, nearly quadrupling in value for the year to date. Unsurprisingly, analysts are bullish on the consumer discretionary stock. According to S&P Global Market Intelligence, the consensus recommendation among analysts stands at Buy.
However, analysts’ price targets have not been able to keep up with the rally in the large-cap stock. Indeed, the average price target of $142.25 represents a steep discount to current levels. Analysts will likely raise their price targets in the days and weeks ahead following CAVA’s beat-and-raise quarter.
SBUX gets another Sell rating
Starbucks (SBUX) rose 1% despite being downgraded to Sell from Neutral at financial services firm Redburn Atlantic, which cited concerns about the cost to deliver the coffee chain’s newly-introduced turnaround plans.
Redburn Atlantic analyst Edward Lewis downgraded Starbucks stock to Sell from Neutral (the equivalent of Hold) and assigned a $77 price target. “Our chief concern is the cost Starbucks must incur to deliver this recovery,” Lewis wrote in a note to clients “With shares trading above a 20-year average price-to-earnings multiple, there is little room for error.”
The analyst believes the costs of the turnaround plan are not currently reflected in analysts’ estimates for Starbucks, which means the consumer discretionary stock is overvalued at current levels.
It should be noted that Lewis is not the only bear on Wall Street when it comes to SBUX. Of the 34 analysts covering the stock, 11 rate it at Strong Buy, six say Buy and 13 call it a Hold. Meanwhile, one analyst rates SBUX at Sell and two have it at Strong Sell. That works out to a consensus recommendation of Buy, albeit with low conviction.
Meanwhile, the Street’s average target price of $102.38 gives SBUX stock implied upside of just 3% over the next 12 months or so.
