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Market Insights

Soft inflation print leads to everything rally

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US inflation came in soft. Markets soared on the news with the S&P 500 and NASDAQ both gaining over 5% on the day. The question on everyone’s lips… Is the rally sustainable? Is this the start of an inflation reversal? Or just some short term relief?

So let’s take a look at the chart of the S&P 500 to really get a grip of what’s been happening:

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A huge rally yesterday took the price beyond the 20 & 50 day moving averages. Next target the 200 day moving average in the 4070 zone?

The CPI Rally

What sparked the move?

  • Monthly headline CPI printed 0.4% MoM, below expectations of 0.6% MoM
  • Core CPI printed at 0.3% MoM, also below consensus of 0.5% MoM

Yearly inflation figures also missed expectations. Overall, this was a much softer print, just as markets have noted a messaging shift towards a more gradual tightening regime from central banks.

On this front, it’s worth paying attention to the paradox facing markets now. The central bankers' goal of tighter financial conditions to bring inflation back to target vs the unquantifiable ‘animal spirits’ in markets.

Yesterday, Federal Reserve Bank of Cleveland President Loretta Mester said:

“Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2%”

The underlying message is “higher for longer”.

Goldman Sachs (via the WSJ’s Nick Timiraos) highlighted the opposite effect:

“Goldman Sachs reports that its intra-day estimate of U.S. financial conditions from its financial-conditions index eased by over 50 basis points today following the rally triggered by the October CPI print. That is the third-largest single day decline on record.”

Tighter financial conditions can reduce the value of collateral, disincentivize lending, and generally slow the pace of economic activity. Which means that rallies such as we saw yesterday are the opposite of central bankers’ desire.

However, there’s plenty of evidence that the economy is slowing, and the excesses are being ironed out. Companies that ‘over-hired’ during the pandemic and subsequent year, are now laying off staff, and being rewarded by the market for doing so.

Take a look at Meta, up 25% on the week. We highlighted their decision to reduce their workforce by 13% earlier in the week. Amazon also outperformed yesterday (+12%) after reports that CEO Jassy is in the midst of a cost-cutting review.

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However, it’s far too soon to say that the Fed, or any developed economy central bank can cut rates. Peaking inflation is just the first step on the road back to target.

In those same comments, Cleveland Fed President Loretta Mester said that she expects inflation to reach the Fed’s target by 2025(!)

For now at least, it seems as if markets are happy to see this inflation print as a ‘glass half full’ moment. However, if energy prices rise again, and/or inflation proves stickier than feared, this could spark another leg lower in the future.

Not investment advice. Past performance does not guarantee or predict future performance.

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