Broker Check

A “Good” CPI Report: Core CPI < 0.2%, 4.0% y/y. Market Reaction: A strong rally

November 14, 2023

A strong rally. A solid drop in Core CPI will help to calm concerns that inflation is bouncing back and that should trigger a solid drop in Treasury yields and a rally in stocks. Tech and growth should outperform on a decline in Treasury yields and a greater-than-1% gain in the major averages wouldn’t surprise me today. Most other sectors should also rally, although we’d expect them to underperform tech and growth. Treasury yields should fall potentially sharply (more than 10 bps for the 10- and 2-year yields) as markets again aggressively price in the Fed being done with hikes and possible sooner-than-expected rate cuts. The Dollar Index should fall moderately given the recent rally, and a decline toward 105 isn’t out of the question. Finally, commodities, especially gold, should rally on the weaker dollar.

I have been predicting for months that when the 2 year Treasury Yield breaks down and the dollar weakens that we are in for a strong sustainable rally. That is exactly what we are seeing over the past 2 weeks. I believe this is real and will take us to at least the end of the year. We are now positioned for all of this move.

The net impact of last week’s data and Fed speak was that they both pushed back on the market’s aggressive adoption of the view that the Fed is done with rate hikes and rate cuts may be coming sooner than expected. That pushback came primarily in the form of a hawkish tone from Powell, who said he wasn’t confident that the Fed had inflation under control. That tone was more hawkish than Powell’s comments at the FOMC press conference two weeks ago and they sent Treasury yields higher on Thursday, which weighed on stock prices.

Bottom line, outside of Powell’s comments and the jobless claims data, last week was quiet. But as mentioned, the net impact of Powell’s speech (along with other Fed members) was to push back on markets aggressively pricing in a less-hawkish Fed and that sent yields higher and stocks lower last Thursday.

Meanwhile, data was conflicted and that’s consistent with what we saw two weeks ago, where there are simultaneous hints of strength (initial claims) and deterioration (continuing claims). That can happen at the start of economic slowdowns, so we will remain focused on the economy as this coming week will be important for inflation and the hard landing vs. soft landing debate.

Growth and technology is the theme for this rally and that is where we have moved the accounts. Enjoy this because it has been a long time since we have seen this pure economic driven rally.

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