US Close: Head-Scratching Day on Wall Street, Massive stock market reversal, FX volatility to remain extreme, Oil pops despite massive build, Gold little changed, Bitcoin back above $19k

Today’s market reversal was a head-scratcher. Despite a hot inflation report, US equities turned positive as some investors are convinced core inflation will soon start trending lower. Fed tightening will remain aggressive at 75bp pace in November and possibly December. Monetary policy is quickly getting restrictive and that will undoubtedly send inflation lower. It looks like rates will peak slightly above 5% and for some that is good enough of a reason to get back into stocks.  Today’s rally probably got a boost from short covering as well, but given the path for rates is higher, this market reversal won’t last long.

CPI

The November FOMC meeting should be easy after a hot inflation report cemented expectations for a 75bp rate increase and removed the need to begin preparing markets for a downshift in tightening for the December meeting.  Core inflation surged to a fresh four-decade high, rising 6.6% in September.  The headline inflation reading rose by 8.2% in September versus a year earlier.  Each inflation component came in hotter-than-expected as shelter, food and medical care indexes contributed to the hot report. 

It doesn’t seem Core CPI will show clear signs of trending lower anytime soon given shelter prices are nowhere near moderating.  The Fed will likely need to remain in tightening mode for a few more meetings, which would indicate rates will have to reach 5% or go even higher. 

FX

Buckle up currency traders, the rest of the trading week should remain extremely volatile.  The British pound had its best day in two years on expectations the UK government will have a major reversal with their fiscal agenda.

The Japanese yen was on standby for this inflation report and now Japan will have to decide whether they will maintain efforts to prevent further weakness. The dollar is down significantly against the European currencies, but only a touch softer than the yen.  Initially, the dollar rallied to the strongest levels against the yen since the post-Asian crisis.  The yen futures contract posted a significant spike and some traders believe that could be the ministry of finance at work. Interventions seldom work unless they are coordinated, so any Japanese yen strength might be short-lived here.    

Oil

Crude prices rallied after energy traders digested a mixed EIA report and a very hot inflation reading that suggests the Fed will tighten rates until something breaks.  It is somewhat surprising to see crude higher despite a massive headline draw and a scorching hot inflation report.  The headline draw was mainly driven by a massive SPR draw and many energy traders are concerned with the low diesel inventories heading into the winter.  The inflation report should have triggered a significantly strong dollar but other FX factors, specifically speculation about a UK fiscal reversal and another intervention from Japan, prevented the dollar from rallying.

The crude demand outlook is going to see massive downgrades over the coming months, but right now it seems the market will remain tight. If China’s Covid situation doesn’t completely lead to massive lockdowns, oil should find a home above the $100 level. 

Gold

After all of today’s fireworks, gold prices ended up finishing the day right around where they started.  The global bond market is responsible for today’s moves in gold.  While Treasury yields are higher and will likely continue to rally, the yields on gilts are in freefall.

Gold is starting to look like a safe-haven again in Europe and that should help with some of the typical weakness we see when Wall Street starts pricing in more Fed rate hikes. 

Crypto

Bitcoin was getting dangerously close to the summer lows but has now rebounded back above the $19,000 level.  Technical selling could get ugly for Bitcoin on the break of $17,500, but for now it seems the consolidation pattern will continue to hold.  The US is entrenched with inflation and that should pave the way for more massive Fed rate hikes which will deter appetite for risky assets, including Bitcoin. 

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