SPX500 Exuberant as Cooler Inflation Strengthens Expectations for Peak Rates

SPX500 Analysis

Tuesday's CPI data showed that consumer prices were flat in October compared to the prior month and moderated to +3.2% y/y. Core inflation ticked down to 4% y/y and the smallest increase in two years. These figures raise the bar for additional tightening by the Fed and markets had never really embraced September's one-more-hike forecast. Peak rates optimism was reinforced and market expectations for the first cut was brought forward. CME's FedWatch Tool assigns the highest probability to this outcome materializing in May, from June previously. ^[1]

Bond yields slumped after yesterday's report, which was cheered by Wall Street and SPX500 posted one of its best days of the year, extending this month's rally. This gives it the opportunity to push for new 2023 highs towards 4,640.

Wall Street tries to maintain the positive sentiment today, with the stock of big-box retailer Target Corporation trading more than 10% higher in pre-market, following its Q3 results. The firm reported a 36.3% y/y surge in net profits, to $971 million and the highest in more than a year, while the gross margin rate widened to 27.4%. Not all was rosy though, with CEO Brian Cornell speaking of a "very challenging external environment". Same-store sales declined for second straight quarter (-4.9% y/y) and Target (TGT.us) projects another drop in the current fourth quarter. ^[2]

The SPX500 rally has led to highly overbought conditions and even though there is progress on inflation, it is still far from the 2% target and the Fed is unlikely to declare victory yet. Furthermore, with a strong economy that continues to outperform and a tight labor market despite coming into better balance, policymakers may need to do more to restore price stability.

As such, a slide back towards the Ichimoku cloud would not be unreasonable. However, strong catalyst would be required for daily closes below the EMA200 (at around 4,335) that would endanger the bullish bias and sustained weakness does not look easy under current conditions.