What matters is how the Fed feels about falling inflation

The softer-than-expected inflation print in the US sent the stocks higher and the US dollar lower, but the S&P500 couldn’t clear key resistance levels, as investors know that the Federal Reserve (Fed) Chair Jerome Powell could coldheartedly kill the market joy at his post-FOMC press conference today. 

On the right path, but

Yesterday’s inflation report in the US filled investors with joy and further hope that 

1. Inflation in the US may have peaked this summer and we will be heading lower from here, and,  

2. The Fed will adopt a softer monetary policy stance and hike, yes, by 50bp today, but certainly not more than another 25% in February.  

The problem with that is, swap pricing now points at a peak Fed rate of less than 4.90% in Q1, while the Fed will likely carry on pushing the rates at least to and above the 5% mark.  

Therefore, the chances are that Jerome Powell will seem satisfied regarding the falling inflation  - because it means that whatever turmoil the Fed has been causing in the markets is at least working through to the end goal of taming inflation.  

But Powell could also stress the fact that inflation remains significantly high compared with the 2% policy target, and that relaxing the tightening measures prematurely is not a good idea.  

Therefore, there is no guarantee that the latest fall in US inflation will lead to a softer terminal rate on the dot plot. The Fed officials will likely plot a terminal Fed rate of above 5%, and the gap between where the Fed sees its peak rate next year, and where the market thinks the Fed rate will be a risk for investor appetite.  

This is maybe why we saw a great kneejerk reaction to the CPI print yesterday, but the S&P500 didn’t rally as much as expected. The S&P500 futures gapped higher at the open, but gently softened to close the day with less than a 1% advance, without being able to clear the 4100 resistance and the ytd bearish trend top.  

This means that investors are cautious before Jerome Powell’s press conference and the dot plot. They know that the last thing the Fed wants is to reverse slowing inflation by triggering a bullish market euphoria.  

And at the end of the day, it’s Jerome Powell, and the Fed, who will either give a green light for a modest Santa rally, or tell investors that Santa is stuck in a snow storm this year. 

Significance of the dot plot 

It’s important to note that the dot plot projections give an idea on how the feeling and the expectations change at the heart of the FOMC.  

But it’s not rocket science.

If you look at the rate projections last year, the Fed funds rate was expected to advance to 0.90% by the end of this year. But the rates advanced far beyond that level. Assuming that the Fed will hike by another 50bp today, the Fed rates will finish the year at 4.25/4.50%. It’s more than five times compared to the projections.  

The softer-dollar joy  

The US dollar index fell following the softer-than-expected CPI print, and hit a fresh low since summer.  

The EURUSD spiked to 1.0673, Cable advanced to 1.2444 and the dollar-yen re-tested the 200-DMA to the downside, and gold spiked to $1824 per ounce.  

The softer US dollar, and stronger euro sent the European indices to fresh highs since summer. The DAX flirted with the June peak, and the Eurostoxx50 traded at the highest level since February 

Crude oil rallied more than 2.50% yesterday, on hope that the Fed could slow down the rate hikes, and not push the US into a deep recession to fight inflation – in which case, the scenario of a soft landing could materialize and prevent demand outlook from becoming too morose.  

But the rally in US crude remained capped at around $76pb, and the surprise US inventory build last week, pre-announced by API, may have capped the topside. The more official EIA data is out today and could mark the end of a series of 4 consecutive months of significant decline in US inventories.  

Bitcoin can’t care less about the FTX, Binance drama 

The FTX drama continues with the arrestation of Sam Bankman-Fried in the Bahamas, and news that investors withdrew $3.7 billion worth of funds since last week, the last $1.9 billion being withdrawn over the past 24 hours.  

Plus, Binance reportedly stopped the stablecoin USDC withdrawals.  

But Bitcoin couldn’t care less. The price of a coin advanced more than 3% yesterday, and tested the 50-DMA to the upside, showing that the FTX drama has been priced in and out and further drama should not hit the coin harder.  

The same is not true for cryptocurrency exchanges, however, which remain at a hot seat with the drama spilling over to other exchanges. Coinbase shares lost more than 9% yesterday.