Disinflation Takes Hold – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

Investors and traders are finally ‘on board’ with Mr. Powell, Federal Reserve Chair. After rate hikes from June of 2022 to the present, and ranging from 0.75 percentage points to today’s 0.25 percentage increase, major progress in fighting inflation is apparent. After one month, in the new year, market indices are drifting higher. Led by the tech-heavy Nasdaq Composite and many surprising earnings reports the average has risen 10% in January, a strong start for the year. The bond markets have also flourished: the ten-year Treasury rate and the two-year, both have garnered staggering amounts of capital earmarked from the stock markets. Many signs such as inflation falling, positive earnings reports and the general condition of the economy have swayed investors and traders back into equities. Many economists, strategists, and those on the street question recession talk, citing the earnings trends and the falling inflation. Time will tell the story.

The Dow Jones Industrial Average fell 200 points after Monday’s opening on fears of the upcoming FOMO Policy meeting prior to the rate hike announcement, and more jitters on the big earnings report due this week from Apple. The Dow wasn’t the only casualty, as the Nasdaq slid over 2%. The market weakened at the end of the month, as the indices were all positive.

General consensus amongst market economists, strategists, and the ‘street’ was to expect a quarter point boost, as the inflation rate is slowly heading downward. That thinking proved to be correct as Mr. Powell announced a quarter percent hike, and was quick to note these hikes would continue as needed. After December’s half point hike, it was welcome news, and immediately gave the market a boost. Inflation cooled slightly to 6.5% in December (CPI) as it has since the hikes started in June 2022, with the initial hike of 75 basis points through November with December’s boost of 50 basis points. Mr. Powell was notedly optimistic at the press conference Wednesday, after using his favorite word ‘disinflation’ several times giving a measure of positiveness to investors and traders, a welcome comment. “The key comment from Mr. Powell’ came from a response to a question by Howard Schneider of Reuters.” Powell’s response was: “We can now say, for the first time, that the ‘disinflationary’ process has started. We can see that.” Reaction was ‘electric,’ as the Nasdaq Composite spiked 231 points. Hopefully moments of optimism like Mr. Powell’s will spur positive market activity.

The CPI, Consumer Price Index, dropped 0.1% to 6.5%, continuing its slow downward decline, after months of rate hikes. A major contributor to the CPI is food cost, both at home, up 11,8% and up 8,3% dining out. Conversely gasoline prices have fallen steadily since November.

The Sleeping Giant Has Awakened…Chinese equities are on a tear, after the government terminated all restrictions of its zero-covid policies. In just three months stocks are up nearly 50% in the world’s second biggest economy, in a country with a 1.4 billion population. Money managers in many leading world economies are swarming to jump back to Chinese equities. As China’s massive manufacturing ‘machine’ cranks up and returns to pre-covid capacities, world-wide competition for nearly every product will become keen, including EV automobiles. The reopening is in its infancy, with the sleeping giant taking a strong stance.

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Steven Ricchiuto, chief economist at Mizuho Securities USA Barron’s “Judging by the price action in markets over the past couple of months, it appears the consensus is already waiting impatiently for a soft landing train to arrive, even though the engineer and the conductor have yet to board,” he writes.

Terri Williams, Agent at Re/Max Preferred Properties, Sevierville, Tennessee, WSJ “As spring comes in and more and more properties come on the market and people will be a little more used to 6% (mortgage rates), I think that we’ll see people jump on the ‘I want to be a homeowner’ bandwagon.”

Randall W. Forsyth, lead writer of UP & DOWN WALL STREET, Barron’s “Gold’s out- performance, relative to stocks, suggests that the expectations of future Fed easing are less than bullish for equities, given the metal’s simultaneous message of continued inflation.”

Diana Swonk, chief economist with KPMG, US, Barron’s “The Fed can’t afford for the financial markets to get too far ahead of them right now,” Swonk says, adding that such a dynamic heightens the possibility of prematurely reflating the economy. “They know what history tells them, and that’s not a risk they’re willing to take.”