This inflation report was a nice surprise. Inflation has been very slow to come down, but this report gives up hope that this deceleration with pricing pressures might bring back hopes of a soft landing. The headline reading came in lower-than-expected, but most traders were focused with the month-over-month decline with core prices. If this downward trajectory for inflation holds, then you can make a strong case that the bottom is in place for US equities.
US stocks are rallying as Wall Street finally sees light at the end of the Fed’s tightening cycle tunnel. This cool inflation report helped stocks post their best trading day in two years. Treasury yields are in freefall, the dollar is tanking, and practically every risky asset is rejoicing over this inflation report.
Inflation
Inflation has peaked but don’t hold your breath waiting for it to get to target. Inflation is cooling after the core reading only posted a 0.3% monthly increase. The headline reading dropped more than expected to 7.7% from a year ago, which is noticeably better than the peak reading from June of 9.1%.
Inflation almost always proves to be stickier, so traders should not be surprised if the descent in pricing pressures takes a little while longer.
Good prices have been coming down and that was supported by lower readings from cars, apparel, and energy services. Wall Street is closely watching shelter prices, which rose 0.8%, the most since 1990. There was some optimism with housing affordability as the monthly gains slowed for rents. Shelter prices always take the longest to come down, so investors will expect this key contributor to core PCE to remain hot for another quarter.
This inflation was a good sign that the Fed is on the right path to winning this war with inflation, but there will still be a lot of variables thrown its way over the next couple of quarters. The Fed could easily bring rates to 5.00% and if inflation proves to be stickier, it could be as high as 5.50%.
FX
King dollar has left the building after a soft inflation report cemented the Fed’s downshift to a slower pace of tightening and revived hopes of a soft landing. The price reaction to this inflation report was a bit excessive but could be justified if the next couple of inflation reports are just as cool.
Cryptos
A dark crypto period was supposed to begin following the FTX debacle, but a cooler-than-expected inflation report gave every risky asset a massive boost. FTX contagion risks remain elevated and while today’s broad-based crypto rally is rather impressive with bitcoin rising over 10% and ethereum surging by 16%, investment into cryptocurrencies will likely struggle here as too many key institutional investors and crypto companies have money tied up with the bankruptcy bound exchange.
Until we see which players were impacted by FTX and if we see other exchanges vulnerable to a liquidity crunch, any crypto rebound might be faded. More details about the actions of FTX will lead to harsher regulatory guidelines for all crypto exchanges. Reportedly FTX used customer assets for risky trades, which means it seems unlikely anyone will want to rescue this company.
Trading analysis offered by Flex EA.
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