Economy

October 13, 2022

Sellers Squeezed As Inflation Sticks

We pointed out yesterday the relative tiredness market participants feel about inflation data. And today’s action in the market is further evidence of that theory.

But before we get into that, let’s take a look at September’s CPI data. Headline numbers rose 0.4% MoM and 8.2% YoY, while the “core number,” which excludes food and energy prices, rose 0.6% MoM and 6.6% YoY.

That jump in core inflation pushed it to the largest 12-month gain since August 1982. Looking under the hood, it appears a sharp rise in shelter prices was the primary culprit. 🏠

Now, many believe that today’s data is not reflective of the economy’s actual inflation rate. The way that the CPI report calculates shelter includes a significant lag and is not reflective of the current market conditions. This goes back to Cathie Wood’s argument that the Fed is looking through the rearview mirror instead of the windshield when making policy decisions.

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As we explained yesterday, whether you agree with her points or not, this is the Fed we’ve got to work with. 🤷

And sticky inflation means that the Fed will continue tightening and hold interest rates higher for longer. That quickly sent the S&P 500 down more than 3%. However, stocks battled back throughout the day and closed more than 5% off their pre-market lows.

Market participants are pointing to two potential reasons for today’s rally. ✌️

The first is short-term positioning and the negative sentiment coming into the release. The S&P 500 was already down 6 in a row and flirting with a critical level (the June lows). When the market gets too stretched over a short timeframe, and many are positioned short ahead of the bad news, that sets it up for a potential squeeze.

The second reason focuses on the bigger picture. The Fed’s messaging around inflation hasn’t changed in months, nor has the data. Maybe, just maybe, the market is beginning to look past the inflation data and toward other data. The bearish narrative about inflation, the Fed, and the economy are all out there. Maybe everyone who wanted to sell based on that thesis has already sold?

Which reason, if either, is ultimately correct remains to be seen. With that said, many market participants believe today’s action could start a bear market rally. 🤔

We explain more in the post directly below. 👇

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