Stocks Rally From Losses Caused by Inflation: S&P recovers from a more than 2% Decline on CPI data.

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Short covering is conceivable but highly anticipated: John Bernstein.

A high inflation figure that caused losses in US markets quickly recovered on expectations that the year-long selloff had maybe bottomed out.

The S&P 500 recovered from a loss of up to 2% and is now headed toward ending a six-day selloff that brought it to a two-year low. Technical proficiency had a role in the bounce. The index had partially reversed its post-pandemic surge at one point, which led to programmed purchasing. As profits were booked, a wave of put options purchased to guard against such a rout entered the money, which forced dealers to purchase equities to maintain market neutrality.

Last month, a measure of consumer price increase reached a 40-year high, making it inevitable that the Fed will raise interest rates significantly in November. Before Thursday’s recovery, stocks had fallen by 25% this year as the central bank intensified its anti-inflation measures, leaving investors to assess the damage to share values.

In addition, a lot was priced in, according to Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “There may be some short covering going on,” he said. Larger policy rates indicate a higher likelihood of a harsh landing, and there have likely been some defensive positioning recently in the equity markets.

After falling below 3,500, a level not seen in two years, the S&P 500 recovered.

All year, risk assets have been under pressure as central banks strive to rein in spiraling inflation. The most recent report, which follows last week’s payroll numbers showing the unemployment rate at a five-decade low in September, indicates that the severe monetary medicine has not yet taken effect.

Rate market predictions now tilt toward consecutive 75 basis-point increases at the following two Fed meetings. They now anticipate that before the tightening cycle is through, the central bank will raise rates above 4.85%. 3.25% is the current rate.

According to Max Gokhman, chief investment officer for AlphaTrAI, “if you had some levered CTA who had a big buy program set to start around 3,505 and then another levered short who doubled down on the CPI print that could have created this snowball where the market just ripped as other levered technical systematic traders piled in.” Or, somebody simply received a large margin call. When everything has settled, we can learn.

According to Ellen Hazen, chief market analyst, and portfolio manager at F.L.Putnam Investment Management, “there is so much uncertainty in the market, and so many data points are contradictory that the market responds to the most current data point.” The market was up before the market opened this morning due to the UK’s reversal, but when we received the CPI, it started to decline. When we consider that we jumped off of this level of support, it becomes self-fulfilling.

James Athey, investment director at abrdn, said this isn’t the CPI number that the markets or the Fed expected. The inflation rate is still persistently high. The Fed is stuck in an unambiguous hawkish position for the foreseeable future. This is additional bad news for stocks but will bolster bond rates and the US dollar.

According to Seema Shah, an analyst at Principal Global Investors, nobody in the market would still think that the Fed would raise rates by less than 75 basis points at its meeting in November. If the same positive surprise occurs again the following month, we may be in for a fifth straight 0.75% rate increase in December, pushing policy rates over the Fed’s projected peak rate for the year.

According to Steve Chiavarone, senior portfolio manager at Federated Hermes, “any continuing pick-up in energy costs can send us to a new high” regarding headline inflation, given the most recent CPI report. This “may startle markets as it pushes back any forecast of peak inflation, peak Fed hawkishness, and even compel the market to consider a terminal fed funds rate above 5%.” That would increase the likelihood of increased bond pain, equity pain, and financial accident risk.

In business news, Delta Air Lines Inc. climbed after announcing that its projected earnings for the year’s final months will exceed Wall Street’s forecast. Following the release of better-than-anticipated quarterly sales, Domino’s Pizza Inc. reported double-digit growth. On Friday, major banks, including JPMorgan Chase & Co. and Citigroup Inc., are expected to release their earnings.

Nearly two weeks after the government disclosed a proposal to substantially slash taxes, the UK markets are still in chaos. Because of news that government officials are planning a U-turn on tax cuts, the pound rose back over $1.13. Gilts also increased in value, and the 30-year bond rate decreased by as much as 46 basis points.

After the US inflation news, the yen plunged to its lowest level in more than 30 years before abruptly reversing course, raising market speculation about a potential intervention.

A US crude report signaled possible positive factors, while markets analyzed hotter-than-expected inflation data, which helped oil prices rise above $89 per barrel. The International Energy Agency had already issued a warning that the production cuts agreed upon by OPEC+ ran the risk of driving up oil prices and sending the world economy into recession.

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