October’s colder-than-expected consumer inflation report sparked a massive rally in stocks that could herald the traditional fourth-quarter rally of the midterm election year. Bond yields fell sharply as stocks soared after October’s consumer price index rose 0.4%, less than the 0.6% expected. The gain was 7.7% from a year ago, less than the 7.9% expected by economists polled by Dow Jones. Core inflation, excluding food and energy, also surprised, rising 0.3% month-on-month from estimates of a 0.5% gain. . Strategists had been expecting a rally in the fourth quarter since the midterm election years, which they always have. Now that Tuesday’s election is over and inflation appears to be heading in the right direction, strategists say it could be time for a resumption of risk. Of course, they also warn that there is a risk that the rally could be derailed by another hot inflation report or other factors, like the crypto meltdown. Thursday’s CPI report breaks a surprising upward inflation chain. As the Dow Jones Industrial Average jumped over 800 points, the 10-year Treasury yield fell to 3.82%. Yields move opposite the price. The Nasdaq, the hardest hit by the rate hike, rebounded 5.6%. In the futures market, traders bet on a low end point for Federal Reserve rate hikes. According to BMO, federal funds futures are valued at a federal funds terminal rate of 4.88% in May, down from 5.05% before the inflation report. “The mid-terms are over. We’ve finally broken the inflation trend here,” said Jim Paulsen, chief investment strategist at Leuthold Group. “We doubt what the Fed can or cannot do. And who knows, Russia just suffered another big loss yesterday.” Russia’s invasion of Ukraine was a big catalyst for inflation this year, as it led to increases in the price of energy and other commodities. “We thought there were multiple triggers for a multi-week rally,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. Evercore ISI had previously called for a spike in inflation, but the CPI report more clearly pointed to a decline that was broadly embraced in the market on Thursday. Emanuel said that given the extreme focus on inflation this year and the “extreme positive correlation of bonds to equities and the dollar’s correlation to equities,” market moves on Thursday were clearly large. “The fact that the CPI triggered such a volatile drop in yields and a volatile drop in the dollar absolutely tells you that the psychology of the stock market has shifted in line with very positive year-end and post-midterm seasonality,” Emanuel said. Emanuel said the market now sees inflation moderating, adding that the Fed may take a break in 2023, although strategists expect the central bank to keep rates higher. . “Our year-end price target is 3,975 [for the S & P 500]. If you just look at how far the bear market has rallied since the last low in June, and think we could hit 4,150,” he said. The S&P 500 was just above 3,900 in morning trading. Strategists also point to risks, including the crypto market collapsing with the collapse of crypto exchange FTX and big losses for crypto investors. Bitcoin also rebounded after the CPI report, gaining more than 6% at a level of $17,554 on Coin Metrics mid-morning. “Although the jury is still out, it looks like the economy is going to be resilient enough that crypto isn’t the much-dreaded contagion it was 24 hours ago,” Emanuel said. “The CPI report may have eased the view that the Fed will continue to raise rates to well above 5% for now. But the report is just an entry for the Fed, which is expected to continue raising interest rates until next spring.” Now the question is what we hear from the Fed. This will determine how far the rally can extend. A single data point is not enough to make this claim entirely, but it adds to this case [for peak inflation]”, said Ben Jeffery, rates strategist at BMO. Economists had expected some easing in inflation, and it could continue to moderate as housing and other costs fall in the coming months. “It confirms the Fed’s view that more measured rate hikes now, but that doesn’t stop them,” KPMG chief economist Diane Swonk said. “It just confirms their plan. Prices for housing-related items, such as appliances and furniture, are falling, and she expects the CPI to show a sharp drop in housing costs early next year. “From the Fed’s perspective, that’s good news, but not enough to stop them from raising rates and tightening them,” she said. “What worries me the most is how quickly you can compress delays in this regard. We just don’t know what’s going on in crypto and where the landmines are that could trigger a crunch. broader credit market.” Strategists warn the rally could be temporary, and Emanuel called it a “bear market rally.” Paulsen said that soon market attention may return to the idea that the “The economy could fall into recession next year. “The problem is going to be very quickly that the anxiety is going to build up to ‘inflation is slowing, but so is growth?'” Paulsen said. “I think the market will be okay with that, but that’s definitely where it’s going to go. The other discussion that comes up, can we land a soft landing? It will be a powerful discussion if people think the war on inflation is on, but they also think it’s just a mid-year downturn.”
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