CEO Sightings

Investor Optimism Soars: CPI Softening Fuels Bullish Sentiment for Year-end Market Growth

By:JJ Kinahan

Stocks and bonds surge amid weak CPI report. Will the Fed rate stance shift?

  • Weaker CPI report sparks stock and bond surge, reinforcing potential Fed rate stance shift.
  • Market momentum after CPI softening hints at positive year-end, aligning with historical trends.
  • House's funding extension stalls government spending issue, signaling impending debates in election year.

Stocks and bonds surged yesterday following a weaker-than-expected consumer price index (CPI) report. The Russell 2000 led the indices, soaring by 5%, followed by the Nasdaq Composite and S&P 500, which recorded gains of 2.4% and 2%, respectively. Concurrently, the yield on the 10-year note also saw a decline, settling at 4.44%.

The recent CPI data indicated a moderation in inflation, with prices remaining steady on a month-over-month basis. Year-over-year, prices showed a 3.2% increase, slightly down from the previous reading of 3.3%. This subdued inflationary trend aligns with the notion of a '”soft landing,” where interest rate hikes work to control inflation without tipping the economy into a recession.

A Fed rate cut by next June?

Expectations before the latest report suggested an 86% likelihood the Federal Reserve Open Market Committee (FOMC) would maintain rates at their December meeting. Post-report, these probabilities surged to 95%, as per data from the Chicago Mercantile Exchange. There's also a growing optimism that the Fed might consider rate cuts in the following year, with a 75% chance of a cut by June.

The upswing in equity prices following this data might signal positive prospects for investors until the year's end. A Bloomberg speculated that in each of the last 22 years when stocks surged 5% or more by mid-November, the remainder of the year ended positively. Looking back 50 years, stocks added gains in 26 of 30 instances. Even in the four instances where stocks increased by 5% but experienced subsequent losses, the declines were under 1%, offering promising insight despite market fluctuations.

Government may keep the lights on

In Washington, the House passed a bill extending government funding into early 2024. Should this bill pass the Senate and gain President Biden's approval, it would maintain current spending for certain agencies until January and for others until February. This extension, while providing temporary relief, only delays addressing the inevitable. Because 2024 is an election year, hopes for a bipartisan agreement on spending negotiations remain tempered.

Tuesday's rally saw a 1.5% decline in the U.S. dollar, coupled with a 4% drop in the Chicago Board Options Exchange's volatility index, which is known as the VIX. In premarket trading, Target (TGT) shares surged by 14% on the back of stronger-than-expected earnings and an outlook for holiday sales in line with last year's figures. Additionally, the latest producer price index (PPI) and retail sales reports unveiled a mixed scenario: PPI slightly weaker than anticipated, while Retail Sales surpassed expectations. Consequently, bond prices witnessed a downward trend by almost a full point in premarket trading, while stocks edged higher.

Amid these developments, adhering to one's investing strategy and long-term plans remains prudent in navigating the market's fluctuating landscape.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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