November 10, 2022
SPX rally follows a cooler than expected CPI print. Consumer Discretionary, REITS and Tech are outperforming, while defensive groups like Health Care and Staples lag but still post solid gains. Treasury yields are sharply lower with the 10-year down to 3.85%. The dollar is broadly weaker with notable mean reversion in $/¥. The weaker dollar has Gold up +2.5%, while WTI crude gains +1% to $86.70bbl.
October headline and core CPI came in lower than expected with light positioning dynamics keeping equity risk skewed to the upside. Headline CPI came in at +7.7% YoY vs. consensus for +7.9% and core CPI printed +6.3% vs. consensus for +6.5%. Pricing eased most in food at home, energy services, used vehicles, apparel, transportation, medical services and non food/fuel commodities. The cooler inflation numbers should help the Fed slow its pace of tightening to 50bp in December, with emerging calls for a 25bp hike.
Terminal rate expectations fall from 5.10% to 4.83% and are pulled forward to May from June. Over the last 18 hours, Fed officials Evans, Kashkari and Logan suggested it’s time to slow the pace of tightening, while Harker said he favors a pause at 4.5% (Fed funds now 4%).
Our CPI scenario analysis (yesterday) assumed a headline CPI print in the 7.7%-7.9% range could take the S&P 500 (SPX) up +2%. Today’s +7.7% number is at the low end of the range and generating a >4% rally above technical resistance at ~3900. The scenario analysis also included a 6% rally from a headline print at or below 7.6% and a ~4% rally from a 7.7% number makes sense in that context. Closing levels matter most, but all the necessary ingredients for a technical break above 3900 are now in place. The contrarian indicators (sentiment/positioning) have been in place for months. Our mid-October call for a Q4 rally followed daily and weekly momentum divergences that often precede major inflection points. The missing ingredient was lower terminal rate expectations, but it looks like we have that now. Terminal rate expectations have declined from 5.10% to 4.85% today and the SPX should be able to sustain levels north of 3900 as long as terminal rates remain closer to 4.75% than 5%. Stronger technical resistance for the SPX sits in the 4100-4150 range and clearing that level likely requires terminal rates closer to ~4.50%. Keep in mind there’s another inflation number due tomorrow in the Michigan consumer survey.