Investors digest lower-than-expected CPI as risk-on assets rallied while DXY sunk into the weekend

US inflation data has been painful for markets for most of 2022, but October’s slowdown has given new hope to a less aggressive Fed rate hike. Investors grabbed their chances with both hands as US stocks and bonds hit their highest level since spring 2020 while the dollar index fell in its worst daily decline since 2009.

US headline inflation eased to 7.7% from 8.2% in Sep, the slowest pace of inflation since January.

Core inflation rose 0.3% in October, taking the core reading to 6.3% from a 40-year high of 6.6%.

Core CPI monthly change: (Source: Macroscope)
Core CPI monthly change: (Source: Macroscope)

A slowdown in core and headline inflation has raised new hopes of slower rate hikes and an early end to the Fed cycle. Philadelphia Fed President Patrick Harker said:

I think the pace of rate hikes will slow as we get closer to a sufficiently restrictive stance.

Expectations are now firmly set for a 50bps rate hike in December and a 19bps cut from the Fed Funds rate peak expected in June.

Currencies and Commodities: (Source: TradingView)
Currencies and Commodities: (Source: TradingView)

A sharp drop in US Treasury yields and the dollar showed demand for risk-on assets as investors saw headline inflation could roll over. US stocks surged gold and silver as the S&P closed his 5.5% higher and the Nasdaq closed his 7.4% higher. Both Bitcoin and Ethereum rose 6% and 8% respectively on positive news.

The rally was short-lived as the FTX sages unfolded. After a moment of optimism by investors and a brief boost to prices, bearish sentiment could re-establish itself and resume capitulation, pushing prices even lower than before.

Nasdaq bear market rally: (Source: Stockcharts)
Nasdaq bear market rally: (Source: Stockcharts)

The Nasdaq Rally rose 7.5% on Nov. 10, its biggest gain since March 2020. According to the stock chart, days like this don’t happen in a bull market. From 2000 to his 2002, the Nasdaq had his 14th day of gains of more than 6%.

Moreover, in 2008-2009, the Nasdaq rose more than 6% over six days, and traders would have been wrong four times to think that a bottom had occurred.

Positive market narrative from peak inflation to recession with the Fed likely to pause, pivot or eventually resume quantitative easing at some point in the first half of 2023 may have changed.

Posted In: Bear Market, Research

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