To The Moon

The story begins with the annual meeting of the global central banks at the end of August. A hawkish talk by the chairman of the Federal Reserve completely reversed the little luck left in the market, and its effect is still fermenting today.

During this period, several important events have continued to catalyze the financial market, forming the phenomenon that stocks and bonds have fallen together at present. It can be said that every change is proving that inflation remains high and the effect of monetary policy is not obvious.

Continuous hawkish talks among officials will not be mentioned. It can be said that they have not stopped for nearly a month or two, fearing that the market does not know their determination. But it is the CPI data that really determines the market trend.

The US released CPI data for August and September, and the market reaction was bipolar

On September 13th, the world looked forward to the release of August CPI data by the United States. As the CPI of the previous month has dropped from the peak of 9.1% to 8.5%, with the substantial revision of crude oil prices at the same time, there is a chance that the market will take a step down to 8.1%. According to the announcement, the CPI in August was 8.3%. Although it was said that it would continue to drop compared with the previous 8.5%, it was still disappointed when it was higher than the previous 8.1%. As soon as the news came out, the stock market plummeted, the US dollar rose sharply, and the US debt fell low, the market fully responded that the hawkish policy was about to deepen.

A month later, on October 13th, CPI appeared in September. The market is still expecting good news that prices will cool down, but after the baptism in September, the optimistic expectations disappeared and were replaced by more caution and test. Facts have proved that the core CPI excluding food and energy is 6.6%, continuing the strong trend of the previous month, both higher than expected and previous values, and refreshing the highest growth rate in 40 years again. However, CPI 8.2% showed a similar lower than the previous value and higher than expected performance as last month.

What is puzzling is that the same performance is higher than expected and lower than the previous value. When it was announced on September 13, stocks and bonds went down simultaneously, in a negative response.

Why is the market reaction polarized? The Fed's interest rate policy is still an unwavering hawk, isn't it?

The reason behind this may be related to the psychological changes expected by the market. As we all know, the Fed's interest rate policy is mainly to fight inflation at present, and the sharp drop on September 13th was not just 0.2% higher than expected. From the breakdown figures, we can know that the energy price has dropped sharply, but the CPI decline is not as good as expected, which means that other projects have offset the effect of the energy drop.

To put it bluntly, the rise of housing and service items is the main reason that drives inflation down less than expected, which can also be proved by the fact that the core CPI does not decrease but increases.

The situation at that time showed that the Fed's monetary policy was ineffective in combating inflation in some projects. The next possible response plan is to raise interest rates continuously to enhance the effect, and to think that monetary policy will eventually fail to suppress inflation. It will not be good news for the global economy suffering from inflation, and US stocks responded with a sharp drop.

On October 13th, apart from the reasons that it has fallen deeply, the FOMC meeting on interest rates on September 21st is the most important gap. In the written information of the Economic Forecast Summary (SEP) published after the meeting, the Federal Reserve greatly adjusted the space for raising interest rates next, and the last two FOMC meetings in 2022 were greatly adjusted from the previous range of raising interest rates，

Here, we share a very useful analysis tool, namely the FedWatch Tool of CME, which uses the 30-day federal funds futures pricing data to speculate on the market's expectation of the possibility of the Fed raising interest rates. At the next meeting, for example, the FedWatch Tool currently predicts a 96.5 percent chance of a 3-yard (75 basis points) rate hike. It should be noted that FedWatch Tool's forecast is dynamic and will adjust the possibility of raising interest rates according to market conditions. (Click to use FedWatch Tool: https://www.cmegroup.com/cn-s/trading/interest-rates/countdown-to-fomc.html)

​On the other hand, under the impact of the Federal Reserve's possible adjustment of interest rate hikes, US debt fell sharply, and the market has digested the negative effect of strengthening hawkish degree. This may explain why after the CPI was announced on October 13th, the market reversed, which was quite different from the previous month's performance.

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