Positive mood holds after inflation print

Lower-than-expected US inflation spurred Wall Street to its biggest one-day gain since 2020.

Was that the moment? 

Lower-than-expected inflation in the US ignited a spectacular one-day rally for stocks on Wall Street as investors decided it was time to start ignoring the interest rate uncertainty. Markets had been primed; locked and loaded ready to go at the first good news story in a while. CPI inflation hit +0.4% for the month and 7.7% annually, the lowest annual increase since January. Core CPI increased 0.3% for the month and 6.3% for the year. This fuelled a monster rally for stocks, with the S&P 500 up 5.5%, its biggest one-day gain since 2020. The Nasdaq composite rose more than 7% with Meta up more than 10% on the day, Amazon rising 12%. European stock markets are higher this morning again, with the risk-on mood further boosted by China easing some quarantine restrictions for travellers. US stock futures are higher, too, extending yesterday’s march higher, with Nasdaq 100 futures back to 11,700, the 50% retracement of the move up off the 2020 low to the all-time highs. 

The beginning of a string of lower prints? 

This was the lowest inflation reading since January, though the one bit that the Fed should have control over was actually higher. Rents rose, but used vehicle prices and airline fares were down. Services inflation is sticky...the reading does not shout victory and I think ex a couple of doves, the Fed and Jay Powell will push back against a sense that this means a pivot is coming. Markets latch onto any kind of positivity and we have seen false starts so many times lately it’s hard not to think that this is the same. But maybe there is light at the end of the tunnel for inflation? Are higher rates finally catching up? San Francisco Fed president Mary Daly said it “may soon be appropriate to slow the pace of rate increases”.  

Does the FOMC really pivot on one print? 

It feels like disappointment awaits bulls. Tactical rallies are certainly ones to ride if you can time it, and I’d expected a ramp into December. But let’s go back to what Powell said only one week ago. He stressed the “need for ongoing rate increases...ground left to cover...it is very premature to be thinking about pausing". He stressed the Fed would need to see “a series of down monthly readings” on inflation for evidence that Fed policy was working. But he also said he’d “never thought of that as the appropriate test for slowing the pace of increases”. I would caution that big outsize days like that are only possible in a bear market… it doesn’t mean much really. In fact, it probably only confirms that we are still in a bear market. 

Dollar drops

The dollar was offered hard on the inflation print as Treasury yields declined. GBPUSD bounced off its 100-day line to 1.17. The euro also rose sharply versus the dollar, with EURUSD up to 1.02, its highest since August. There has been some recent technical weakness in the dollar and the market was clearly itching for anything positive to drive risk up. This does not mean that the market has turned and late dollar shorts might not find they see an awful lot more. From here at 1.07 the dollar index can retest 1.05 in the short-term without giving up leadership. 

UK recession

The UK is now effectively in a recession. The economy shrank by 0.6% in the last quarter, more than the 0.4% decline anticipated. Whilst there was an extra unscheduled bank holiday for the Queen’s funeral, its points to consumers really reining in spending ahead of Christmas as the cost-of-living squeezes hits hard. Many will have also been shoring up finances before turning on the heating in October. Notable decline in retail was evident, though the decline was driven by a drop in manufacturing activity. Again higher energy costs are evident.