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Stocks surged in a rising tide lifts-all-boats scenario as slower-than-projected inflation galvanized bets the Federal Reserve can downshift its aggressive rate-hike path.
To say markets reacted positively to the report would be an understatement, as the enraptured price action suggests investors interpreted the softer inflation print as a significant turning point, particularly in inflation, central bank hawkishness, recession risk, and investors' bearishness. All of which should pave the way for a Santa rally on the back of a better-tempered Fed to the cheers of global investors. These moves should see investors dancing in the streets.
Although inflation remains at decade highs, at minimum, things are moving in the right direction, not to mention the downside surprise is the best news we've had in some time. Notably, the anticipated Fed downshift comes at a critical juncture and should offset covid related economic concerns in China and, at minimum, provide a less hawkish bridge for the eventual reopening.
The dollar's rise over the past year has left Asian markets increasingly exposed to capital outflow, so with one fell inflation swoop, that external vulnerability has been eased and should open the door to inbound investment given the softer US dollar and an expected less hawkish Fed.
President Xi Jinping has broken tradition and wants all policies to be consistent with resilience and self-reliance. Hence foreign investors should drive flow toward tech and manufacturing.
Given the move in global rates, the post-CPI first leg will likely play out through Asia tech.
Gold
Gold soared as the cooler-than-expected US October CPI has the market pricing in a 50bp Fed hike in December, which sees the greenback tanking positively for gold.
Investors who bought into the long gold theme last week are well-placed to benefit from a Fed pivot, with prices poised to rally as real rates peak and eventually head lower.
Oil
Oil prices are also getting a reprieve from the weaker US dollar, and a significant repricing lower in US recession risk as a soft landing looks far more credible with the Fed likely to dial down.
That said, oil prices were the risk rally laggard as sentiment is still sullied by the rise of covid case counts in China and anticipated lockdowns.
Rolling lockdowns across heavily populated areas in China penalize mobility and oil demand even more than economic activity.
Since traders are hyper-sensitive to lockdowns in the world's largest oil importer, this could temporarily hold the oil market's top-side ambition in check. But unquestionably, we are in a much better place than yesterday.
Forex
The October US CPI print is good news for the Fed. It should cement the stepdown in hiking pace to 50bp at December's FOMC, greenlighting another bout of USD weakness, a narrative the market has already been leaning into, setting up further USD turnover into 2023. So we could expect long USD unwinds to remain in vogue
Temper expectations?
The 'easy' bit for US inflation is getting from 10% to 5%. The tricky bit is getting from 5% to 3%. And the challenging bit is getting from 3% to 2%
The US Federal Reserve laid out its policy path in September: 75, 50, 25. And the data follows a way that matches that. December was guided as 50, and it looks like it will be. The risk, however, is that the stickier parts of inflation remain, well, tacky.
Futures drove most of the move higher, and the same with ETF hedge unwinds. It will be interesting to see if the activity in rates will trigger a more significant rotation back into growth. If you think liquidity was lousy yesterday – it will get worse today with bond markets closed.
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