VOT Research Report

Market Analytics and Considerations

US CPI gives central bank doves new life

Wow such a market week it has been. Following a strong start in the wake of last Friday’s disappointing US jobs report, sentiment began to wane on Wednesday as China began to announce sharp increases in Covid cases, which caused investors nightmares about the prior two years’ worst periods.

But when it comes to solidifying the positive feeling in equities markets, Thursday’s CPI certainly did the trick. The result for October revealed that the year-over-year growth decreased to 7.7% from 8.2% in September, which is under the forecasted 8%. Both the headline and core monthly readings fell short of market forecasts in May (6.3% vs. 6.5%), while core inflation also declined less than anticipated (6.3% vs. 6.5%).

And as if this weren’t enough, the weekly increase in unemployment claims exceeded forecasts for the very first time in four weeks, which coincided with the higher unemployment rate revealed last Friday. In all honesty, the meaning of the jobs data was a little hazy because it didn’t really reveal how it had changed throughout the month, but it provided Fed doves cause for optimism. This served as adequate preparation for this week’s spectacular comeback.

The fact would be that this milder CPI reading has gone hand-in-hand with the rising unemployment, which has rekindled thoughts that the Fed will need to change course soon if they don’t want to risk a catastrophic recession.

It also helped that Patrick Harker, a member of the Fed who will cast a ballot in the upcoming election, stated soon after the data was announced that he might be in support of halting rate increases if the rate reached 4.5%. Markets are pricing in a high likelihood of that occurring in December, which indicates that there may be significant resistance from voting members to continue raising rates in the coming year, or at least to do so at the current growth rate.

Even if there is still a lot that can happen between now and then, and we doubt Chairman Powell would cave in so quickly just after one or two months’ worth of encouraging data, market bulls enjoyed it. Whether the markets have gone overboard is the main concern right now?

Since the Covid lows in March 2020, the S&P 500’s (US 500’s) daily performance has improved significantly. It was able to move over its 20-day, 50-day, and 100-day simple moving averages and break through the 3,920 resistance that had stood since mid-September. Growth companies now have a greater opportunity than value stocks due to the shift in how interest rates are seen, but given the movement in US treasuries – 10-year yields fell by the most in a single day since 2009 – there will likely be a time of rebalancing considering the shift in perceptions.

Although positive sentiment is expected to continue for a while, stocks don’t necessarily have to go up. Updated data and fresh information will keep coming out, and as I already said, we doubt the Fed will capitulate to just one or two encouraging data reports. This has up the possibility of some disappointment in the Fed’s pivot narrative, and during the next week, corrective measures are probably going to be taken.

Technical Bottom line

The RSI has increased recently, although it is still securely below its overvalued level, according to the daily chart. Since there isn’t much resistance between now and the 200-day SMA, this permits further positive momentum in the near term (4,069). The constructed selling momentum is expected to start to play out at this point, and the S&P 500’s proximity to the 2022 trend line suggests that it will encounter resistance when it gets closer to the 4,050 region.