CPI peaked? Why market rebound so strong?

After the Oct CPI, three major indices all went up, with $NASDAQ(.IXIC)$ up 7%, the biggest gain in 3 years. The euphoria that swept through the stock market on Thursday was historically well-founded: whenever inflation tops out, double-digit gains follow.

The Oct. CPI of 7.7% was sharply below market expectations of 8% and Cleveland fed's 8.1%.

Core CPI of 6.3% was better than market expectations of 6.5% and lower than last month's 6.6%.

Data from Bloomberg

How did CPI segments move?

9 of the 14 categories of CPI are declining, indicating that the decline in prices is more comprehensive, unlike before when it was mainly driven by energy.

Goods: The decline on the goods was mainly driven by used cars and apparel, which fell 2.4% and 0.7%, respectively from a year earlier.

Services: market were worried about this sector most. But this time we also saw a rare decline, driven mainly by medical services, which fell 0.6% from a year earlier.

Why did the Oct CPI boost market so much?

This is the first time CPI has fallen below 8% in seven months, and the lowest since the outbreak of the Russia-Ukraine conflict.

1) Long-awaited peak

CPI in October was 0.5% lower than the previous month's 8.2%. This is a significant drop. Investors have been waiting for a clear turnaround in inflation and this CPI did surprise investors.

The most reassuring thing is that the core CPI excluding food and energy fell. Core CPI is more concerned by the Fed, and its changes have a greater impact on the stance of monetary policy.

2）Fed officials revealed pivot signal

Many Fed officials also expressed that Fed may slow the pace of rate hikes.

Philadelphia Fed President Harker noted that the Fed is approaching a point where it may be able to slow the pace of rate hikes.

Federal Reserve Bank of Philadelphia President Patrick Harker said

In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance.

Dallas Federal Reserve President Lorie Logan said

This morning's CPI (Consumer Price Index) data were a welcome relief, but there is still a long way to go. Inflation is much too high.

The Fed officials' comments were consistent with Powell's tone last Wednesday, both foreshadowing a 50 bps in December. But at the same time, they are also warning the market not to relax, they are still very hawkish.

3) Dec rate forecast becomes more certain - 50bps

The CME also reacted to today's upbeat inflation data and the probability of a 50bps rate hike in December has exceeded 85%, but the terminal rate for next year is unchanged, with mainstream forecasts suggesting it will be around 5%.

data from cmegroup

Risk Warning

Icahn said he is shorting the S&P 500 and commented:

A rally like this is very dramatic, to say the least, but it always happens in bear markets, and I still think we are in a bear market.

I think the Fed has to keep raising rates, and if it doesn't, then things are going to be worse in the future anyway.

Do you think the uptrend will continue after the CPI?

Or we should short the dramatic rally?

Will Fed pivot after the midterm and CPI?

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