- The much-awaited Consumer Price Index (CPI), a measure of inflation, which is now arguably the most-watched monthly economic data series, came in above expectations.
- The headline number came in at 8.2% on a year-over-year basis versus a consensus estimate of 8.1%. Subsequently, the market started to anticipate a higher probability of an even more aggressive Federal Reserve (Fed), with the potential for 0.75 percentage point rate hikes in both November and December. At the same time, the 10-year U.S. Treasury yield traded to a cycle high of 4.07%.
- The knee-jerk reaction for the equity market was a sharp selloff, with the S&P 500 down 2.4% in early trading. However, a sharp reversal ensued, with stocks finishing up more than 2.5%.
- There was not a single news item for the reversal. Instead, our view is that this was a market already braced for bad news. Indeed, several metrics suggest investor positioning is underweight equities and expectations are low. At the intraday low on Thursday, the S&P 500 was down 27% from its January peak, close to the average recessionary peak-to-trough decline of 29%, and down 18% from mid-August alone.
- Another positive is the turnaround in the 10-year U.S. Treasury yield, which traded as high as 4.07% after the report and moved down to 3.95% later in the day. This is important insofar as higher rates have been pressuring stock valuations. Thus, the reversal here is also supportive near term and something to monitor.
- As we have discussed recently, our core view for choppy markets, advising up-in-quality and defensive positioning over the next six to 12 months, remains intact. The most aggressive Fed tightening in 40 years into a slowing economy continues to suggest the rising probability of a recession over the next six to 12 months.
- However, markets do not move in a straight line. Moreover, markets are all about how things are coming in relative to expectations. And today’s reaction to a disappointing inflation print suggests investors have very low expectations and are already positioned accordingly.
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