Morning Wrap: S&P 500 pops 5% on cooling inflation, US dollar tumbles, ASX set to surge

Wall Street had its best day in two years as inflation finally begins to peak, every US sector rallied led by Real Estate, Tech and Materials, the US dollar tumbles to a near three month low and a 75 bp rate hike is now mostly off the table for the Fed's December meeting.

Let's dive in.

MARKETS

US markets surged as inflation came in below expectations, reviving hopes of a deceleration in prices, a downshift in Fed tightening and a soft landing. The cooler-than-expected inflation print triggered a bunch of good things: the VIX fell -10% to 23, bond yields tumbled, the US dollar sold off and risk assets rallied. The power behind the inflation data was truly extraordinary.

• The S&P 500 had its best day since April 2020, where the market experienced a series of +5% rallies off the pandemic lows

• The likelihood of a 75 bp rate hike versus 50 bp was an almost coinflip scenario in the lead up to the inflation print. Now the likelihood of 50 bps is 80.6%, according to CME’s Fedwatch tool

• Yield sensitive real estate stocks led to the upside

• Growth-heavy and richly valued stocks from Tech and Discretionary surged

• Materials higher thanks to a convincing selloff for the US dollar, now down -5.9% from September highs

• Defensive sectors and Energy underperformed benchmarks

• 83% of US stocks advanced

• 46% of US stocks trade below their 200-day moving average (56% on Thursday, 58% a week ago)

STOCKS

Nothing too exciting in terms of stock announcements. Everything gapped up thanks to the cooler-than-expected inflation print.

Amazon (+11.95%) launches a cost-cutting review focused on unprofitable business units, according to the Wall Street Journal.

• "As part of this year’s review, we’re of course taking into account the current macro-environment and considering opportunities to optimise costs.

ECONOMY

US inflation eased to 7.7% in October from 8.2% in September.

• Below consensus expectations of 8.0%

• Indexes which declined in October included used cars and trucks, medical care, apparel and airline fares

• Increases in shelter, food and medical care were the largest of many contributors

US core inflation fell to 6.3% in October from 6.6% in September.

• Below consensus expectations of 6.5% 

US inflation commentary:

• Still cautious: “US inflation slowed more than expected in October, fueling hopes that the peak has passed and the Fed can slow the pace of rate hikes and perhaps bring them to an earlier conclusion. However, the jobs market remains tight and month-on-month readings are still tracking far higher than required to get inflation back to 2%. We can't give the all-clear yet.” - ING

• Fed to remain hawkish: “We would expect to see some fairly hawkish rhetoric over the coming days' messaging, that while there likely will be a moderation in the size of rate hikes, inflation is not defeated so the Fed has more work to do with a higher terminal rate than it signalled in September.” - ING

• Sticky services inflation: “Stabilisation in core consumer goods prices seems to have finally happened … [but services inflation] has picked up … way too high for the Fed to take much comfort.” - Fitch 

Fed speech highlights:

Philadelphia Fed President Harker:

• “In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance.”

• : “... at some point next year, I expect we will hold at a restrictive rate for a while to let monetary policy do its work.”

Cleveland Fed President Mester:

• “This morning’s October CPI report also suggests some easing in overall and core inflation … there continue to be some upside risks to the inflation forecast.”

COMMODITIES

Iron ore futures rose 1.6% to US$88.6 a tonne.

Oil did not bounce with much conviction after a three-day slide that shaved off -7.3%.

• “Crude prices were heavy early as concerns grew over China’s COVID situation. ​ Energy traders were quick to jump back on the oil trade after a cool inflation report brought hopes back to life that the US economy could still have a soft landing.” - Oanda senior market analyst, Ed Moya

Gold surged past US$1,750 as a cool inflation report revived hopes of a more dovish Fed moving forward. The yellow metal is up 7.7% in the last five sessions.

• “It looks like the dollar died today and chaos in crypto has made good ol’ gold very attractive again. ​ Gold is breaking out here and it could have a steady path towards the $1800 level if dollar weakness remains.” - Moya 

QUICK BITES

US inflation breakdown

Source: Carson Investment Research

Previous bear markets: "What do past bear markets tell us about this one? The 1946 and 1968 analogs suggest that the worst is over in terms of downside risk, but also that the next bull isn't on the horizon yet." - Jurrien Timmer, Director of Global Macro at Fidelity

Source: Fidelity

New Fed rate expectations: After the CPI print, the market now expects the Fed to do 50 bps in December, 25 bps in February 2023, 25 bps in March 2023, take a big pause and begin cutting rates in November 2023 onwards.

Source: Compound Capital

Wow. What a rally. It looks like JPMorgan was on the money with its inflation scenario analysis, with views that a print of 7.6% or below would trigger a 5-6% rally for the S&P 500.

The cooler-than-expected print triggered all the stuff the market's been longing for.

The US dollar index continued to sell off, a tailwind for commodity markets.

US dollar index (Source: TradingView)

The US 2-year Treasury yield tumbled and now approaching recent lows of 4.3%. The 2 year is often viewed as a gauge for short-term interest rate expectations.

US 2-year Treasury yield (Source: TradingView)

Sectors to watch

This is the easy part. SPI futures suggest a +2.09% open, so the market gaps up strongly and so do most stocks. This makes it rather hard to chase because the ASX has had time to digest the overnight news, instead of reacting to it in real time.

The question is, do we hold onto gains and kick on, or will the open represent the session high?

Stocks going ex-dividend over the next week:

• Fri: Challenger (CGF)

• Mon: Lion Selection Group (LSX)

• Tue: QV Equities (QVE), Plato Income Maximiser (PL8)

• Wed: Challenger (CGF) 

• Thu: Wam Leaders (WLE), SSR Mining (SSR), Westpac (WBC)  

ASX corporate actions occurring today:

• Dividends paid: CPT Global (CGO), Charter Hall (CLW), Newmark Property (NPR)

•  Listing: None

Other things of interest (AEDT):

• 6:00 pm: Germany inflation rate

• 6:00 pm: UK Q3 GDP growth

• 2:00 am: US consumer sentiment