Thursday’s consumer price index (CPI) report was a massive negative surprise.
Headline CPI rose 0.4% month-over-month (double expectations), and hotter-than-expected 8.2% over last year.
Core CPI is now up for 28 straight months, soaring to +6.6% year-over-year – the highest since August 1982…
Under the hood, food and shelter jumped notably, despite energy drops, but …
The real surprise turned out to be the market reaction. It took one minute for S&P futures to drop 3.5% and then rally 4.7% in the next two hours.
There is a lot more going on the markets than simply inflation.
Today, we’ll take a look at what is driving the rally and where we go from here.
Change Is in the Air
I have said all week that the inflation narrative is weakening as a global economic crisis narrative is building.
Janet Yellen and the ECB provided a couple of jolts of dovishness that supported stocks yesterday near the 3500 key support area.
First, Yellen expressed worries over a loss of “adequate liquidity” in Treasury bonds during a speech in Washington yesterday …
This has been the sector I have been concerned about for weeks, for a couple of reasons …
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Fed quantitative tightening is stuffing the banks with bond supply and limiting their ability to provide liquidity in the secondary market.
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Foreigners are forced to sell US bonds to generate cash to pay for more expensive energy due to the rising dollar.
Yellen’s argument was that …
Treasury debt outstanding has climbed by about $7 trillion since the end of 2019, while banks have been burdened by the supplementary leverage ratio, or SLR, which requires that capital be put against such activity, as well as against reserve holdings.
I believe this will be one of the first moves made by the Fed to add liquidity to the bond market.…
I have started buying the short-term iShares US Treasury Bond ETF (SHY) and I will also be looking to reset my bearish inflation bets i.e. short SPY and HYG and long the dollar vs the Euro (FXE).
The other shift in sentiment came from the ECB staff announcing that their target rate for this tightening cycle will be 2.25%, which is well below what the market had been looking for.
The bottom line yesterday was, the market was very bearish coming in … and right after the CPI number it went down to the 50% retracement of the post pandemic low at 3,515:
I believe we will revisit that level prior to the Fed FOMC meeting on Nov. 2, when the Fed is 100% expected to raise rates another .75%.
Bring It Home
The Power Income Trader portfolio has been on a good October run so far. We are in a market environment right now with plenty of global macro cross current flows …
If you are patient and wait for the low risk/high reward price, volume and volatility set up, you can repeatedly close nice wins and then move on to the next one…
I see a very big move coming and for now will keep taking what the market is giving until I see the trigger for the massive move I think we will see in the weeks ahead.
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In the meantime …
Live and Trade With passion My Friend,
Griff