Stocks absolutely erupted this morning in response to better-than-expected inflation data. The Dow, S&P, and Nasdaq Composite all soared, leaping off the charts on a cool November Consumer Price Index (CPI) reading. Inflation climbed just 7.1% annually vs. 7.3% expected last month. Bulls initially celebrated the news.
“The market reaction speaks for itself, with stocks, bonds, FX, and gold reacting as they should. We know the 2022 pain points were 40 yr highs in inflation and the most aggressive monetary response in 40 years,” wrote Bleakley Advisory Group chief investment officer Peter Boockvar.
Other analysts offered equally bullish takes.
“The Fed could dismiss the better-than-expected October as just one month’s data, but the further slowdown in November makes this new disinflationary trend harder to dismiss,” said Paul Ashworth, chief North America economist for Capital Economics.
“Stick a fork in it, inflation is done.”
Several hours after the open, however, overexcited analysts fell flat on their faces as stocks reversed sharply. The Dow even dipped into the red through noon.
Something we mentioned yesterday – the fact that today’s CPI print would do little to alter the Fed’s plans – seems to have sunk in with investors.
Wall Street began to walk back its commentary from this morning as a result.
“While the inputs of inflation coming into that Fed meeting are modestly better, we still don’t know for sure if the Fed’s gonna raise by 50 basis points, if they’re gonna raise their terminal rate. So, we have quickly shifted gears into a into a mode of ‘wait and see’ for the Fed meeting tomorrow,” said National Securities strategist Art Hogan.
Regardless of what the Fed reveals at tomorrow’s meeting, though, it looks like stocks are destined for a correction after the VIX broke out last week.
The VIX set a double bottom earlier this month before closing above the 10-day moving average (10-SMA). It confirmed that breakout yesterday when the VIX surged despite a stock market gain. Typically, stocks retrace the following session when that kind of thing happens.
And, sure enough, that’s what we saw this morning, even after a bullish CPI release. Traders know that the VIX always wins. During VIX uptrends, stocks are destined to fall.
Today’s massive intraday VIX recovery suggests that tomorrow’s Fed meeting might not be able to save bulls. The upside of a dovish post-meeting press conference from Powell will be limited if the VIX can remain above the 10-SMA.
But that hasn’t stopped bulls from hoping for a dovish FOMC. Academy Securities strategist Peter Tchir said that despite most analysts predicting a 50 basis point rate hike tomorrow, he sees a far lower number coming from the Fed.
“I’m betting 0, but maybe it will be 25. I’m in the camp that tomorrow is the last hike in this cycle,” Tchir said.
That’s certainly optimistic, but is it realistic? Probably not. And bulls who listen to Tchir’s advice could get burned yet again, as they have been all year long.
