11.11.2022 – It can happen that fast: A less than feared horrendous inflation report pushes up prices on Wall Street. The Federal Reserve also adds fuel to the fire. What a coincidence… And already one stop-loss mark of the bears falls after the other. The question is: How sustainable is the short squeeze?
The high-tech Nasdaq stock market just had its third best day since October 2008 from the perspective of long traders. Here is the hourly chart of the Nasdaq 100.
Source: Bernstein Bank GmbH
The catalyst for this: the Consumer Price Index (CPI) for October came in at 7.7 percent, slightly below the expectations of most analysts, who had predicted 8.0 percent on the whole. After all, this was the lowest inflation since January. Ergo, many investors assumed that the Federal Reserve would now put the brakes on tightening. And indeed, some doves immediately spoke up: a whole handful of Fed officials drove prices higher.
The Fed encourages the bulls
For example, Kansas City Federal Reserve President Esther George judged that the central bank could now take a more measured approach to assessing the economy. However, she added, a continued path in rate hikes is appropriate.
Patrick Harker, head of the Federal Reserve Bank of Philadelphia, said the Fed could slow the pace of rate hikes in the coming months. And in the coming year, he said, the Fed might even tighten. He favored a pause in rate hikes at a rate of 4.5 percent.
Federal Reserve Bank of Cleveland President Loretta Mester added, however, that the biggest risk in inflation is that the Fed doesn’t raise rates enough. While the October CPI is showing signs of easing, the Fed should continue to raise rates to contain inflation.
Hit the brakes
Lorie Logan, head of the Federal Reserve Bank of Dallas, explained the CPI is a welcome easing – but there is still a long way to go. However, she added, it may be appropriate to slow the pace of rate hikes to reassess the situation.
Mary Daly, head of the San Francisco Federal Reserve, called the CPI “good news.” However, she said, one month of positive data is not enough to declare a definitive victory. In addition, service inflation continued to rise. However, the time has come to slow the pace of rate hikes, he said.
The Dallas Fed’s Lorie Logan also signaled a step on the brakes in a cloistered way: “While I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.”
The Wall Street Journal commented, “The October inflation report is likely to keep the Fed on track to approve a (50bps rate hike) next month.” It said the Fed has already signaled a slower pace. The paper is considered the unofficial mouthpiece of the Fed.
Fodder for the bulls
Our conclusion: the bull run may indeed not be over yet. For it is a strange coincidence that almost at the same time as the CPI, several grandees of the Federal Reserve are pushing themselves into the foreground with predominantly dovish word messages. This looks very much like a signal from the monetary guardians that the interest rate screw is not being tightened as much as feared. And that the cycle of rate hikes will soon be over. Bernstein Bank is keeping an eye on the matter for you!
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