The highly anticipated macroeconomic double headline day has finally arrived, and the results have not disappointed. Firstly, the CPI data came in much lower than expected, with core CPI increasing by 0.16% month-on-month (the lowest level since August 2021), well below the market expectation of 0.3%. The “super core CPI” in particular showed weakness, with a negative value; service spending declined, commodity prices remained stable, and housing inflation rose but remained within manageable levels. Following the CPI release, Wall Street economists quickly revised their PCE forecast from 2.8% to 2.6%, moving in the right direction towards the Fed’s long-term target.
The macro market reacted strongly to the data, with a sharp rally in US Treasuries, as the 2-year yield dropped significantly by 17 basis points, pricing in expectations of a 51-basis point rate cut at the December FOMC meeting. The stock market also saw volatility of multiple standard deviations, with expectations leaning dovish ahead of the 2 pm FOMC meeting. Both the SPX and Nasdaq indices surged by 1.5%, reaching new highs.
Interestingly, the initial FOMC statement and dot plot had some hawkish implications, with the latest Fed projections showing only one rate cut in 2024, down from the previously forecasted three cuts. Additionally, the projected core PCE inflation at year-end is 2.8%, higher than the previous estimate of 2.6%.
Naturally, Chairman Powell spent most of the press conference trying to steer the narrative back to a dovish stance, clearly attempting to downplay the significance of the official forecasts. Powell even stated that “most” officials did not incorporate the lower-than-expected CPI data into their forecasts, suggesting that these projections are somewhat outdated, showing clever maneuvering on his part. Furthermore, Powell pointed out that the job market has returned to pre-pandemic levels, with signs of normalization in job vacancies, quit rates, and labor supply. Economically, the Fed believes that growth will continue at a robust pace, with officials “seeing the conditions they hoped to see, namely a gradual cooling of demand.” Finally, he emphasized the Fed’s focus on downside risks and highlighted achieving an economic soft landing as a top priority.
In summary, Bloomberg noted that Powell mentioned inflation 91 times, while the job market was only mentioned 37 times, indicating that price pressures remain a primary focus. The stock market followed suit, choosing to refocus on the earlier CPI data, with the SPX index closing near 5,438 points, approaching a historic high, while the 2-year and 10-year US Treasury yields closed near 4.70% and 4.3%, respectively, both at weekly lows. The SPX index is currently on the second-longest streak of consecutive records with less than a 2% decline, poised to break another record in just one more month!
Despite the overall strength in the macro environment, cryptocurrency prices struggled throughout the week. The market sentiment was largely bullish, but questions arose about how much of the funds flowing in since the beginning of the year were for accumulating coins rather than for relative value or spread trading, causing Bitcoin to struggle to break through $70,000. Ethereum also fell by 8% this week, mainly due to the fading stimulus from approved ETFs, as well as ongoing competition from Layer 2 solutions and declining transaction fees. The technical outlook currently seems challenging, with cryptocurrencies susceptible to shocks if stock market sentiment reverses belatedly.
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