A Regime Shift?
Macro Perspectives
We got the inflation report - the rate-of-change in prices continued to fall in October. The core inflation rate (excluding food and energy) broke 4%, at 3.91% (according to Fed index data). That's the first time under 4% since May of 2021.
Markets immediately declared the rate hiking cycle as over;
Stocks exploded higher. We talked about the opportunity in small caps earlier this month, a clear laggard on the year - the Russell 2000 was up over 5% on the day.
Yields fell sharply.
The 10-year yield has now fully retraced the levels of the September Fed meeting - reversing the expectations the Fed intended to set at that meeting. To add, the dollar had one of its biggest declines of the past three years.
The last time the dollar had a daily decline of this magnitude was after the October 2022 inflation data (A) - almost a year ago to the day.
The time before that? March of 2020, after the decision by the Fed to go "all-in" to stabilize the lock-down economy (B).
Building on our past discussions, we shouldn't expect to get an "all clear" signal from the Fed on inflation - they will continue verbally posture, in attempt to keep some foot pressure on the economic brake. The market is signaling a regime shift in monetary policy. Keep in mind, at this point the Fed technically ended the rate hiking cycle in July.
So, the market will now be making bets on how early the first rate cut will come, and how many will come next year. This anticipated change in policy direction should mean a weaker dollar cycle, higher commodity prices and higher emerging market stocks.
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