Yesterday, the consumer price index (CPI) was released. It rose less than widely expected and produced the lowest annual inflation increase for 2022.
The consensus expectation is that this should give more incentive to the Fed to impose less restrictive policy on us. As of the morning of Dec 14, Fed Funds futures are pricing in a 79.4% chance that the FOMC this week will announce a 0.5% rate hike, as compared to the previous four consecutive increases of 0.75%.
Some note that even such smaller increases are still “jumbo” and not in context of recent economic developments.
Whatever the truth may be, the release of the CPI yesterday was received with the usual over-eagerness of traders and portfolio managers that tend to expose their money to any market environment as long as there is some hint of of improvement from any economic data point on the planet. Market participants that I believe fail to see the forest for the trees.
I’ve been negative about this rally over the last few months (see here, here, here, or here), and believe it has likely found the end of its upside at the end of November.
The CPI, although in itself a manipulable metric, was good news for people. But whether it means anything right now for the equities markets is a completely different ball game.
This eagerness to expose funds to stocks after these apparently earth-shattering news has pushed the vast majority of stocks on official exchanges to trade strongly higher in pre-market, translating to a gap-up on the NASDAQ Composite as high as 3.8% and 2.7% on the S&P 500.
However, the move was quickly faded and stocks sold off consistently throughout the day. This is in stark difference to the last positive reaction to slowing inflation on Nov 10 … and already then the rally was largely hot air.
This rejection of higher prices and reversal occurred on rising volume, and is a classical sign of a waning rally besieged by sellers. Another nail in the coffin, at least for the time being.
I am expecting volatility around today’s Fed rate announcement and press conference. This volatility may manifest in sharp moves in both directions, more fake-outs, and even an infamous ‘Santa Rally’.
However, the thin character of this rally and the weak action of leading stocks cannot be understated from my point of view.
The way I see things, we will see more downside in the indices and in many darling blue-chips such as Apple (AAPL) at latest in Q1 2023.
