October CPI May Come in Low and Rally the Markets (Cheat Sheet)

Last week, we had another bear week as the technology sector continued to drag down U.S. markets. However, employment statistics released on Friday boosted the chances of a Fed rate cut.

The Federal Funds Rate was increased by 75 basis points last week, bringing it to a range of 3.75–4%; however, the Fed’s inflation target remains unchanged at 2% over the long run. (I wonder if this is a 10YR plan?)

Even though over-tightening remains a major concern for the Fed, economists, and major institutions, the neutral rate is getting closer and closer to everyone’s predictions.

At the conference, the Fed’s Powell stated that “we still have some way to go” to make policy “sufficiently restrictive,” which implies higher interest rates in the future.

During his address, he reassured fears by stating that December was still a possibility. Fed Chair Jerome Powell has stated that the Fed is still not on track to reach its long-term goal of full employment.

Powell reiterated what the Fed has said for months, stating that for these goals to be achieved, the labor market needs to weaken, and growth must be below trend.

Banks Warn of Recession

This week, many major banks have released revised recession forecasts, including JP Morgan (JPM) and various projections from Goldman Sachs. Inflation has changed, according to JPM, and a recession would likely be required to return U.S. and global inflation to central bank objectives.

“Growth is sluggish enough in advanced countries that even minor adverse shocks could precipitate domestic recessions,” the bank notes, predicting 1.1% annual growth in real GDP in the United States and 1.9% worldwide.

In Goldman Sachs’ latest forecast, “If the Fed is going to create a recession, we think it will require more rate hikes than consensus forecasts.” There has been some movement in the consensus assumption that rate hikes will cease after December since yesterday afternoon’s Fed meeting.

While Goldman still expects the terminal rate to be 4.75%, they now predict a recession to occur 50% of the time. There is a 70% chance that the U.S. economy will suffer negative effects.

October CPI & Inflation

We will be getting the CPI report this week. As previously mentioned, CPI is a very dated and bad report because of how the data is collected. I think Truflation, which uses real-time data, is the best way to really understand actual prices in regard to inflation.

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The good news is that Truflation YOY rate is 7.32% which is a significant drop. This makes me think that the CPI report will come in lower. Theoretically, this would greatly increase the chance of a Fed Pivot and cause the markets to jump up.

3 Thoughts on Election & The Markets

There is a lot of anxiety right now concerning the elections. I recommend everyone vote, but realize that the chance of any dramatic changes is low. Here are key thoughts:

  1. Results May Take Longer to Become Final: I fully expect both Republicans and Democrats to challenge results.
  2. Republicans Are Likely To Gain Some Control: Looking at the polls and bookies, it appears that Republicans will gain control of the US House and maybe Senate. Historically a Democrat President and Republican Congress have been great for the stock market. We are facing some recession fears, so they may not play out the same way as in the past.
  3. It is all about the BUDGET: Get ready for some major budget battles as Congress threatens to shut down the government. I suspect there will be significant budget cuts to some agencies and Democrat green energy. Defense stocks may be vulnerable to cuts but unlikely to take huge hits.

KEY EVENTS & CALENDAR

  • Tuesday, November 8 – US Elections
  • Wednesday, November 9 – EIA Petroleum Status Report
  • Thursday, November 10 – CPI (MoM) (October)

For the week of November 8, there are two key monetary market events: midterm elections in the US on Tuesday and US inflation data on Thursday.

Canada and the United States will return to daylight savings this weekend. November 11th is a holiday.

BONDS

According to derivatives, the market is pricing in a Fed rate high of 5.25% for the coming year. U.S. 10-year bonds currently yield 4.12% (up from 3.98% last week).

A possible economic downturn has prompted investors to remain wary of a yield curve inverted with regard to shorter maturities. The bund rate increased to 2.27 percent, and the OAT rate increased to 2.8 percent globally. Gilts have recovered to about 3.53%. The region’s most expensive debt still belongs to Italy and Greece (4.44 percent and 4.65 percent, respectively).

COMMODITIES

OIL

There are reports that China may loosen its zero covid policy on the energy commodities market, which is good news for oil because it indicates rising oil demand.

Europe is planning to stop using Russian oil in 2023. As a result, Brent oil prices in the North Sea rose to $97 a barrel, and WTI prices rose to $91 a barrel.

According to the latest monthly data from the U.S. Energy Agency (EIA), the United States is producing roughly 11.975 million barrels per day, the highest level since March 2020, before the Coronavirus outbreak.

GOLD & PRECIOUS METALS

This week’s metals market performance was dragged down by the Federal Reserve’s steadfastness and the strengthening of the US currency. Because of the continuing effects of Chinese smelter activity despite the country’s economic recovery, the price of zinc on the London Metal Exchange (LME) dropped to a near yearly low of USD 2,680 per tonne. Copper, a key economic indicator, is now trading near USD 7500. Gold has recovered to USD 1,650.

The latest report from the World Gold Council indicates that central banks collected a huge amount of gold during the third quarter. This Gold back into the public eye. The central banks of Turkey, Uzbekistan, India, and Qatar, all of whom are trying to diversify their foreign exchange reserves, bought about 400 tons of gold.

CRYPTOCURRENCY

Bitcoin, the most popular cryptocurrency, outperformed US stock indexes last week, ending the day up nearly USD 21,000. Despite last week’s recovery, which has boosted the spirits of crypto investors, the market remains under pressure.

A macroeconomic climate that remains unstable for risky assets is still affecting the digital currency, which hovers close to its annual lows as it trades. Bitcoin will likely continue to play with the nerves of crypto ecosystem enthusiasts in the coming weeks so that a full recovery may take a while.

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