The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Bulls finally running?
Overnight futures were bid slightly, a common occurrence of late. CPI data released at 8:30 AM and it was cooler than expected. Two months of data released and there were/are some questions when one looks under the hood but the market was pleased with the cooler inflation numbers and equity futures kicked things up a notch. The S&P opened about +50 and wandered around from +40 to +95 over the day. Yields came in across the curve, a welcome change for both equity and bond markets. Fed Funds futures now price a 25-bip cut in January with 27% probability, a slight increase from yesterday.
While many on the Street are suspicious of the CPI data, the consensus is that the adjustments and oddities are not political but simply best-efforts guestimates because the shutdown resulted in various data gaps. It’s a very inside baseball conversation that’s ongoing out there…and not too relevant to the larger market reactions.
The big picture concerning inflation is that it is *not* climbing. That allows the Fed to remain dovish and that allows the inflation fears in the bond market to settle down. The overall result is very helpful for risk-on investing. The stock market responded accordingly although it didn’t rally very much today, all things considered.
The Fed’s actions and path is always a balance of their dual mandate but they have publicly stated that they favor rate accommodation on behalf of labor market risks since September. Inflation data at the time was 50/50, in terms of whether it was declining or not. The Fed chose to risk inflation for the sake of helping labor, and the market agreed with the trade-off.
But over the months, the market started to worry that inflation risk was increasing. The Fed remained confident. There was a market concern that the Fed was committed to easing, with inflation consequences pending as a considered cost. Today, a different conclusion can be given weight.
The Fed can continue to ease and inflation can stay, or fall.
This is a Goldilocks possibility. The market hasn’t latched on to yet but it is warming up to it. If this is how things play out, the next few months will be very good for risk-on players.
Today’s modest gain is the first step of the market pricing in Goldilocks. We’ll see if data and sentiment can deliver more price-steps. If we get those, new highs will print before year-end.
See you tomorrow.
-Mike
Visdom Market Commentary
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