The highly anticipated macroeconomic double headline day has finally arrived, and the results did not disappoint. Firstly, the CPI data came in much lower than expected, with core CPI increasing by only 0.16% month-on-month (the lowest level since August 2021), well below the market expectation of 0.3%. The “super core CPI” even showed negative growth, while service expenditures declined, commodity prices remained stable, and housing inflation rose but still remained within manageable levels. Following the CPI release, Wall Street economists quickly revised down their PCE forecast from 2.8% to 2.6%, moving in the right direction towards the long-term target of the Federal Reserve.
The macro markets reacted strongly to the data, with a steep rally in U.S. Treasury bonds as the 2-year yield dropped significantly by 17 basis points. Pricing reflected expectations of a rate cut at the December FOMC meeting, with a spike of up to 51 basis points. The stock market also experienced significant volatility, with both the SPX and Nasdaq indices rising by 1.5% as the market anticipated a dovish stance at the FOMC meeting at 2 pm, reaching new highs.
Interestingly, the initial FOMC statement and dot plot brought some hawkish surprises, as the latest Fed forecasts showed only one rate cut in 2024, down from the previously predicted three cuts. Additionally, the forecast for core PCE inflation at the end of the year was 2.8%, higher than the previous forecast of 2.6%.
Naturally, Chairman Powell spent most of the press conference trying to steer the narrative back towards a dovish stance, clearly attempting to downplay the significance of the official forecasts. Powell even stated that “most” officials did not factor in the lower-than-expected CPI data into their forecasts, suggesting that these predictions were somewhat outdated, showing a clever response.
Furthermore, Powell pointed out that the job market had returned to a level comparable to pre-pandemic times, with signs of normalization in job vacancies, quit rates, and labor supply recovery. Economically, the Fed believes that growth will continue at a robust pace, with officials seeing “some of the things they wanted to see, namely cooling demand.” Finally, he emphasized that the Fed is monitoring downside risks and hopes to prioritize achieving an economic soft landing.
In summary, Bloomberg noted that Powell mentioned inflation 91 times, while employment market was only mentioned 37 times, indicating that price pressures remain the primary focus. The stock market followed suit, deciding to refocus on the earlier CPI data, with the SPX index closing near 5,438 points, approaching historic highs. The 2-year and 10-year U.S. Treasury yields closed around 4.70% and 4.3% respectively, both hitting weekly lows. The SPX index is currently on its second-longest streak of consecutive records with less than a 2% decline, poised to set a new record in just one more month!
Despite the overall strength in the macro environment, cryptocurrency prices struggled throughout the week. The market was heavily long, and questions arose about how much of the inflow of funds since the beginning of the year was for accumulating coins rather than for relative value or basis trading, leading to BTC’s struggle to break through $70,000. ETH also saw an 8% decline this week, mainly due to the fading stimulus from ETF approvals and ongoing competition from L2 solutions and declining transaction fees. The technical outlook appears challenging at the moment, and if sentiment in the stock market reverses belatedly, cryptocurrencies could easily be impacted.
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