CPI Peaked? Why Reversal? The Truth is...
September CPI was 8.2% and core CPI was 6.6%, both higher than expected.
After the data was released, three major indexes opened sharply lower, with the $NASDAQ(.IXIC)$ opening -2.74% and the $S&P 500(.SPX)$ opening -1.99%. However, the broader market then moved all the way higher, staging a major reversal.
The S&P 500 rebounded sharply after falling to its lowest point since November 2020, fluctuating 5.4 percentage points throughout the day and finally closed up 2.6%.
1. The reason behind the reversal? (bullish factor for stock market)
1) Shorts take profits and closed their "PUT" position.
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said
many traders who had bought defensive puts before then rushed to close out their positions on Thursday, thus pushing stocks higher.
The reversal could mean increased volatility for US stocks going forward, though the rally may last a while.
2) Technical support rally after oversold
Some investors believe the stock market has fully priced in a 75bps rate hike in November, and that the stocks were oversold.
This is especially true after the S&P 500 fell to two key support levels, the 200-week MA and the 50% Fibonacci retracement level since the pandemic, triggering purchases by algorithm-based funds.
3) The dollar fell as the Europe intervened in the exchange rate
British media said that
Prime Minister Truss may abandon his pledge to keep corporation tax unchanged next year.
It directly fueled a surge in British bonds and the British pound ahead of the US CPI data.
2. Has CPI peaked? (bearish factor for market)
Let's look at the segments of CPI. (Orange-energy; Yellow-food; Light blue-commodities; Dark blue-services)
Service has the greatest inertia and it is not easy to reverse. Judging from the rapid growth of the service sector, we are still in a period of rising CPI, rather than reaching or approaching a peak.
- Generally, the largest contribution to CPI comes from services (blue), which have been growing steadily for a long time and can be interpreted as labor costs (let's say wages).
- Energy prices (orange) are unstable and food prices (yellow) grow very little, both of which do not affect the core CPI.
- Commodity prices (light blue) have almost invisible growth or even negative growth for a long time.
3. More aggressive rate hikes in Nov. & Dec. (bearish factor for market)
Accrording to cmegroup, the probability of a 75 basis point rate hike in November rose to 99.5%.
Currently, Nomura's US economic research team expects
consecutive rate hikes of 75 basis points in November and December this year, followed by 50 basis points in February and 25 basis points in March next year.
Do you think this rally will continue this month?
Or it's just a bull trap?
Share your thoughts in the comment section and win tiger coins~
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After an exuberant Thursday with a fantastic turnaround in the markets from 6 days of consecutive drops, the bubble popped on Friday and the US indexes closed down.
It is just a Bear Market rally or a Bull Trap as the fundamentals of the economy have not changed. Inflation is still high at 8.20% with the core inflation at 6.60% in September. The Feds are still hawkish with a laser focus on quelling this high inflation. It is almost certain that interest rate will be raised to at least 75 basis point at the next FOMC meeting in November.
Rising interest rates have an adverse effect on the stock markets and even the bonds too. So for now, I expect that the markets will be experiencing high volatility and the sentiments will be Bearish.
This is the best time to scoop up quality stocks which are oversold and undervalued.
@Tiger_chat @MillionaireTiger @TigerStars