Bulls take control in a historically strong market bounce

Thoughts

• Equity markets are looking to continue a run that saw the best week since May, and gains of 4% or more in three of the past four weeks. The last time the market saw a similar run was in 2000, and it has only happened four times since the 1930s. Investors cheered the release of the consumer price index in hopes for a Fed pivot, with Thursday’s 6% gain the strongest since April 2020. Over the past 20 years, we have seen a 6% move in 12 previous sessions, with half during the chaos around the Lehman bankruptcy, and half near the market bottoms in 2009 and 2020. The bond market remains positively correlated with equities, with the 0.31% decline in the 10-year Treasury yield on Thursday the largest drop since 1996. The dollar saw its sharpest weekly decline since the financial crisis.
• A notable shift has occurred in the market, with investors increasingly risk-on across asset classes. Modestly encouraging news is having an outsized positive reaction, reflecting the degree of pessimism that was priced into markets. Technical indicators have improved dramatically, with investor sentiment, momentum, breadth, and risk factors all showing notable improvement. The CNN Fear & Greed Index has surged to 63 on a scale from 0-100 from 18 a month ago and the best level since January. The VIX fell to a two-month low and the put-call ratio has declined. The bond market has mellowed following a period of extreme volatility through most of the year. The MOVE Index (bond market volatility) has fallen from 160 to 126, while credit spreads have moderated.
• Post-midterm history, fourth-quarter seasonality, and rebounding share repurchases have teamed with improving sentiment to drive risk assets higher. If this induces institutional investors to soften their historic level of conservatism, the rally could be sustainable.

News

• The consumer price index rose a lower-than-expected 7.7% from a year ago, below the 8.0% consensus and 8.2% in September. Excluding food and energy, core CPI rose 6.3%, compared with the 6.5% estimate and 6.6% the previous month. The largest declines were seen in medical services, used vehicles, and apparel. Shelter costs rose at the fastest pace since 1990, though the calculation has a lag, and will likely begin to ease in coming months. If shelter was excluded, headline and core CPI fell on a month-to-month basis for the first time since May 2020. Despite the bullish reaction, the report shows that real wages have now been negative for 20-consecutive months. This report had Fed officials cheering, using words like “gradual” and “measured” to describe the new approach to policy. Over the weekend, however, Governor Waller noted that the group has “a ways to go” before a pause.
• President Biden and China President Xi held their first in-person meeting on Monday to cool tensions between the two countries. Before the meeting, Biden met with leaders of Japan, South Korea, and Australia on Sunday before the G20 meeting in Indonesia. Over the weekend, China announced 16 measures to support the property market, which has been a drag on the economy. Regulators instructed banks to increase financing by $56 billion to the property sector in addition to the $85 billion added in September. These announcements drove China’s market and the yuan to surge higher. Strict Covid policies have harmed the economy, driving produce prices to decline on a year-to-year basis for the first time since December 2020.
• The International Monetary Fund is warning of a gloomier economic outlook, citing weakening PMI data in recent months, driven by stubbornly high inflation, weakening momentum in China, and supply disruptions and food insecurity caused by Russia’s invasion of Ukraine. Morgan Stanley predicts that Europe and the U.K. are heading for a recession, though the U.S. may escape due to the strong job market. The NY Fed’s Weekly Economic Index reflects a growth run rate of 2%.

What to Watch

• Inflation data will remain in focus this week, highlighted by producer prices on Tuesday. Other key data includes retail sales on Wednesday, housing starts on Thursday, and existing home sales and the index of leading indicators on Friday.