Original author: macrofang, PSE Trading Trader
Inflation remains high, but core CPI in line with expectations
While monthly CPI (+0.4%) was above expectations for +0.3%, core CPI (+0.3%) was in line with expectations. The core Consumer Price Index (CPI), which excludes food and energy costs and which economists consider a better gauge of underlying inflation dynamics, rose 0.3% in September, according to the Bureau of Labor Statistics. The 0.4% rise in overall CPI was mainly driven by energy costs.
Recent inflation data reflect the impact of a strong labor market in boosting consumer demand, potentially keeping price pressures above the Feds target. At recent meetings, most officials believed additional rate hikes would be needed this year unless inflation showed signs of easing, despite a recent surge in bond yields.
However, comments from some Fed representatives suggested the central bank may keep interest rates steady at its upcoming Nov. 1 meeting, suggesting further rate hikes may not be needed.
While prices for used cars and auto parts fell significantly, price increases were most pronounced in home costs, vehicle insurance and entertainment services, including tickets to sporting events. Housing costs, which account for about one-third of the overall CPI index, accounted for more than half of the monthly increase, most notably a sharp increase in hotel accommodation. For the downward trajectory of core inflation to continue, it will be critical to maintain sustained accommodation in this category.
Initial jobless claims: short-term drag, long-term positive
Of course, the surge in yields may cause some short-term drag on stocks, but lets not let the minutiae blind us to the overall trend. There are many positive factors: employment data is strong, the labor force participation rate is rising, and wage pressures are under control. This is all good news for the stock market. We remain rational and hedge against tactical risks, but strong growth, a strong labor market, and fewer inflation concerns tilt the trade-off toward long-term equity holdings. But were also not blind to some potential risks: the Feds adjustment to the labor market, the prospect of higher terminal rates - which is pretty much knocking on our door - and potential turmoil in the credit and housing sectors.
On the employment front, jobless claims have continued to remain low in recent weeks, which is a pleasant sound for anyone supporting the economy. And, cause for celebration, 336,000 new jobs were created in September. A tight labor market is a good sign. We expect initial jobless claims to increase slightly to 211,000 for the week of October 7, compared with 207,000 last week, but overall the numbers will remain low.
As for continuing jobless claims, they have also remained relatively low. Theyre up compared to last year, but thats not overly concerning. Taking seasonality into account, we expect this to continue rising in the coming months. We expect continuing unemployment claims to increase to 1.695 million for the week of September 30, compared with 1.664 million last week. Overall, its an interesting situation, so stay tuned!
FOMC meeting minutes: The Fed’s interest rate hike is over!
In line with market expectations, the minutes of the September 20 FOMC meeting presented an optimistic market and stock outlook. An important point is that the Feds upward revision of the dot plot shows a hawkish stance. However, this stance was underlined by the constraints on current policy rates and a call for any future rate hikes to be implemented with caution.
The outlook suggests that only a significantly positive surprise in CPI inflation could trigger an immediate interest rate hike in November.
While further rate hikes later this year or next cannot be completely ruled out, the decision-making threshold has been raised, suggesting a more cautious approach that is generally positive for markets. Despite strong expectations for GDP growth, Fed officials forecast slower economic growth and inflation, a view that helped stabilize market expectations.
The focus now is not on raising interest rates, but on how to maintain them at restrictive levels for as long as possible until there is confidence that sustainable inflation is downgraded. Recent positive employment data and efforts to avert a government shutdown have been balanced by concerns over a rapidly rising long-term interest rate. The Feds cautious and balanced approach, coupled with expectations to keep interest rates steady ahead of a potential recession next year, portends a stable and positive environment for markets and stocks. However, the situation remains dynamic and the possibility of a rate hike remains if inflation and real activity data warrant it.
Markets shrug off war: Bitcoin remains bullish
Its an interesting reminder that financial markets can often learn useful lessons from history.
Past geopolitical conflicts have tended to have limited impact on U.S. stocks. While geopolitical escalation could be serious, past experience suggests that such events are unlikely to have a significant impact on U.S. economic fundamentals or corporate earnings.
Take the US air strike in January 2020 that killed Iranian general Qasem Soleimani as an example.
This incident further reinforces the lesson not to sell stocks due to such events, as historical evidence shows stocks have successfully weathered heightened geopolitical tensions.
The focus highlights the markets surprising resilience during turbulent times. From the beginning of World War II in 1939 to the end of 1945, the Dow Jones rose by 50%, averaging more than 7% per year. As a result, the U.S. stock market achieved overall growth of 115% during the two most devastating wars in modern history. This highlights that the relationship between geopolitical crises and market outcomes is not as straightforward as it may appear at first glance.
war = risk appetite
After Russia invaded Ukraine on February 24, 2022, global markets, including the U.S. SP 500, initially fell more than 7% on concerns about increased economic sanctions on Russia and concerns about commodity prices. However, while oil prices continued to rise above $100 a barrel, the market rebounded within a month, with the SP 500 trading above pre-invasion levels.
Rising interest rates = defensive stocks underperform
War + rising interest rates = good for risky assets (good for BTC)
Digital Gold: Bitcoin = safe-haven asset amid political turmoil
The relationship between gold and Bitcoin (BTC) as stores of value is clear. Bitcoins popularity is largely due to its demand as a digital asset. The market value of Bitcoin has reached US$540 billion, accounting for approximately 10.8% of the market value of financial gold. The market capitalization of gold exchange-traded funds (ETFs) is $200 billion.
This sets the stage for the prospect of the Securities and Exchange Commission (SEC) potentially approving a spot Bitcoin ETF to be listed in the United States, which could bring in $20-30 billion in inflows. This, in turn, could trigger a major rally in the cryptocurrency. Although the SEC has been slow to approve a spot Bitcoin ETF, delaying a decision on new applications until October, the crypto market is optimistic about the mainstream investment trend that such an approval could bring.
The report states that Bitcoin has an advantage over gold because private keys can be remembered, thereby eliminating the risk of confiscation. In a digital age where storing assets in the form of gold is somewhat outdated and where carrying gold across borders can be restrictive, Bitcoin offers an effective solution. It can transfer value across borders quickly and discreetly.
Therefore, according to the current technological environment, Bitcoins main role is as a store of value and speculative financial asset comparable to gold.
