Very strong markets this past week on the back of a drop in both Headline and Core Inflation. Now the question on very one’s mind is just how much juice is left in the markets to continue further upside momentum. Get my takes on the current markets and price action in this week’s Round-Up.
WEEKLY SOUND BITES
Stocks recorded strong gains as investors celebrated reassuring inflation data and bond yields fell. The S&P 500 Index recorded its best week since June and hit its best intraday level in two months. After the release of consumer inflation data on Thursday, the index recorded its largest daily gain since April 2020. Of the past largest single day moves in NASDAQ, 80% of them occurred in Bear Markets.
The signal event of the week was Thursday morning’s release of the Labor Department’s consumer price data for October. Headline CPI rose 0.4% in October, less than consensus expectations of roughly 0.6% and bringing the year-over-year inflation increase to 7.7%—still well above the Federal Reserve’s target, but the slowest increase since January. Even more encouraging for investors may have been the year-on-year core (less food and energy) reading, which fell back to 6.3% from a 40-year high of 6.6% in September. Friday morning release of the University of Michigan’s preliminary gauge of November consumer sentiment fell unexpectedly to its lowest level since July.
U.S. Treasury yields fell sharply in response to the lower-than-expected CPI readings, which also spurred an intense rally in risk assets. The benchmark 10-year U.S. Treasury note yield ended Thursday at 3.81%, down from 4.17% at the end of the previous week. In addition, below investment-grade bonds rallied along with equities after the release of softer-than-expected CPI data.
Shares in Europe rose on slowing inflation in the U.S. Better-than-expected results this earnings season also appeared to lift investor sentiment, although the economic backdrop remains challenging. The UK’s GDP in the third quarter fell by 0.2% sequentially, the first quarterly decline since the start of 2021, when the country was in a coronavirus lockdown. The European Commission forecast that the eurozone economy would contract in the final quarter of this year by 0.5% and shrink by a further 0.1% in the first three months of 2023—a technical recession—due mainly to higher energy prices triggered by the war in Ukraine. Economic growth in 2023 is predicted to slow to 0.3% from 3.2% this year. The commission also raised its forecast for inflation to 8.5% this year, 6.1% next year, and 2.6% in 2024.
Japanese equity markets rose over the week, with the Nikkei 225 Index gaining 3.9%. Sentiment was shaped by the lower-than-expected U.S. consumer price inflation print, which raised expectations that the U.S. Federal Reserve could adopt a more dovish monetary policy stance. The Bank of Japan (BoJ) asserted that it would retain its ultra-loose monetary policy to underpin the fragile economic recovery.
In China, a surge in COVID cases, with the number of daily cases reaching above 10,000 for the first time in over a year, threatened further lockdowns and appeared to weigh on sentiment for much of the week. The week’s economic reports demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below the 4.3% increase that analysts polled by Reuters had predicted and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.
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Trade Smart !
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