After a rough start to the year, markets have charged back and the S&P is now up 4.1% ytd, following Nasdaq’s 5.8% rise. A theme for this year was the intensity of inflation, and when/ how quickly it might turn lower. And yesterday’s sequential decline has given hope to those expecting FOMC rate cuts later in 2023. As a follow up to that CPI data, University of Michigan today was better than expected (64.6 versus estimates of 60.5), with the 1-year inflation component falling to 4% from 4.4% in December.

Investors have had today circled on their calendars since November 10th, hoping for a continuation of CPI prints that are decelerating y/y. The importance, especially ahead of the FOMC tomorrow, could be seen by the early what-if’s that had been cycled via strategy desks. One had broken down how the S&P 500 would react depending on the actual print, while others looked at previous performances on CPI days.

It is surprising that the Webster Dictionary word of the year is gaslighting, considering how much attention inflation has received. It seems impossible to be anywhere without inflation being present, and therefore that may have been a more suitable word. With the next FOMC only 3.5 sessions away, there are two more datapoints that could sway the committee from their 50bp current leanings.

It’s complicated trying to slow down the economy, and therefore inflation, and the Fed is finding that. Investors/ Powell have received mixed signals this week from the busy economic data that has been released. While the ISM manufacturing print on Thursday fell below 50 for the first time since May 2020, amid a sequentially declining PCE, JOLTS and Nonfarm payrolls continue to show demand for workers.

Thanksgiving is finally here, but before investors gorge on the turkey, they had a full appetizer of economic data to feast on. The days of 75s look to be getting close to terminating, and markets have become cautiously optimistic the actual terminal rate level is not too far off as well. Therefore, poor data is the whip crème on those expectations.

The errant missile yesterday offered a reason for traders to take profits, especially as US indexes approached some interesting resistance levels. The S&P 500 was hovering around 4000, and Nasdaq around its 100-day (11,511), and many sectors had similar patterns. Even though positioning remains defensive with higher-than-average cash levels, investors had to protect themselves in case a year-end rally takes hold.

After last week’s fireworks between the Fed and its path, with the additional overlay of earnings, investors took a cautious start to this week. Midterm elections are tomorrow, and the Bond market has a short week with a holiday on Friday (sorry equities), plus there was a lack of earnings and economic data pre-open to generate a direction to start. But after trading sideways to start the day, broader indexes found some footing and rallied, closing with a second day of solid gains.

Tuesday gave the markets a JOLTs that the job market was not rolling over yet. With a Fed furiously intent on dropping inflation, that datapoint sent some shockwaves to those that were anticipating a dovish message via Powell Wednesday. While he did say they would take the “cumulative effects” into account, Powell also said they have “some ways to go”. Cue another week of declines for the broader indexes (SPX -3.3%, RTY -2.7%, CCMP -5.6%) as traders readjust their books to the higher for longer outlook.

It is a new month and markets were feeling good to start. October had a monthly gain for the first time since July, and expectations for a slightly dovish Fed have been growing since the WSJ article and Daly “step down” comment 1.5 weeks ago. But with only one day until the big reveal, US economic data once again showed resiliency, especially in the employment arena.

The sound of silence can be deafening sometimes, and markets have been roaring since last Thursday. After a WSJ article suggesting a smaller FOMC hike in December (therefore breaking the 75bps trend), and Mary Daly mentioning a “step down”, the Fed has been in their quiet time ahead of their next meeting. That has forced traders to rethink the rate trajectory amid a new earnings period, and memories of the July market move under similar circumstances. As October is coming to a close, stocks have put together a nice three-day rally.