U.S. stocks jumped above 4,500 in terms of the S&P 500 broad market barometer, supported by cooling national inflation and retail segment's earnings. Pan-European benchmark indicators echoed by three consecutive days of climbing up as well to test its one-month highs. Investors are waiting for the inflation data from the euro area that will be published on Friday.
The U.S. headline inflation slowed down to 3.2% YoY from a 3.7% YoY in September, which is the first slowdown since mid-summer. On a monthly basis, prices came in flat. This could be also interpreted as a positive sign of halting price pressure, when compared to a 0.4% up a month ago.
The core CPI, excluding its most volatile food and energy components, continued to grow by 0.2% MoM, leading to 4.0% YoY, only a minor correction from 4.1% in the previous month. Yet, the mid-week stock rally was strong enough, mostly ignoring bearish counterarguments.
The FedWatch tool on the Chicago Mercantile Exchange (CME) even accounted for abnormal 100% of bets on a probability that the Federal Reserve's (Fed) would keep the interest rate unchanged on its meeting in December. This very unusual unity of Wall Street traders followed the next day's decrease of the U.S. producer price index (PPI) by 0.5% MoM to lead to only a 1.3% YoY growth of prices at factory gates, within the Fed's 2.0% inflation target. Moreover, nearly 28% of bets are lined up for a rate cut chance already in March 2024, which is in clear contradiction with the Fed's verbal intensions to hold the "higher for longer" restrictive monetary policy.
Fed rates cuts may go "well beyond" expectations, the analyst group at Morgan Stanley wrote, meanwhile, expecting the Fed’s Chair Jerome Powell to deliver four 0.25% rate cuts next year, followed by eight more cuts in 2025, to decrease borrowing costs to 2.25-2.50%. That is even above the current consensus bets for the Fed funds rates by the end of 2024 in a range of 4.50% to 4.75%. This would mean three rate cuts for next year, not to mention the Fed's own official projections for two rate cuts in 2024. Morgan Stanley said in a client's note that the Fed would achieve a soft landing as it embarks on the last mile to curb inflation to target, while also considering a scenario of gradual supply-chain healing combined with tighter financial conditions, may feed a disinflationary cycle.
Interestingly, UBS sees a potential of 275 basis points for the Fed's rate cuts in 2024, while Goldman Sachs feels a more cautious path of just a single rate cut, which may begin only in Q4 2024.
It seems that a drastic change in the Fed's stance would be placed on the table in case of a surge in recession threats, which would be truly difficult to use as a catalyst to continue the stock rally. Both the mad crowd and most of the Wall St expert community are rather prone to a famous line from Gone with the Wind, when Scarlett O'Hara repeated her incant sentences: "I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow".
The bright character of Margaret Mitchell's novel emerged victorious from all life’s ordeals. Can the market replicate Scarlett's resilience and vitality, that is the question. "Apologies, once postponed, became harder and harder to make, and finally impossible”. That is another sentence from the same novel. Yet, this may be related not only to apologising but to taking precautions as well.
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