1. Moving the markets 

The market had a good start today, thanks to some chill inflation numbers. But then it ran out of gas. Literally. Gas prices dropped like a rock, dragging down the producer price index (PPI) by half a percent. That’s the biggest fall since the pandemic started. But if you take out food and energy, the PPI didn’t budge. And it’s still higher than it was last year.

Not everything was rosy, though. Retail sales also dipped a bit. But hey, at least they didn’t dip as much as the experts predicted. That’s something, right?

Meanwhile, the interest rate on the 10-year Treasury bond bounced back after a big drop yesterday. That’s because the market cares more about retail sales than PPI. And apparently, retail sales were hot enough to push up the rates.

But don’t get too excited. Inflation is still a problem. And the Fed is still asleep at the wheel. Just listen to what analyst Peter Schiff had to say:

Prices are going to keep on rising because the budget deficits are skyrocketing. The money printing is going to continue. The inflation burden is going to be heavier, and heavier, and heavier. And this consumer, who has already been shot up, is going to get shot some more.

The reality is the Fed hasn’t done enough to stop price inflation. They haven’t tightened enough to stop the borrowing. But they have tightened enough to break an economy that is rooted in artificially low interest rates.

Will this reality eventually break through?

In other news, the financial situation is still loosey-goosey, the short squeeze is over, bond yields are up, the dollar is flat, and gold is down. Oil prices also took a dive, ending up where they started on Monday.

And in case you were wondering, the government might shut down soon. The House passed a bill to keep it open, but the Senate still must vote on it. And you know how they are.

Would that be a bad thing?

1. Moving the markets 

Stocks soared on Tuesday, continuing their impressive November rally, as investors celebrated a mild inflation report that suggested the Fed might be done raising interest rates.

Tuesday’s gains added to the remarkable recovery this month for stocks. The S&P 500 is up 7.3%, erasing the losses since our “Sell” signal on 9/22/2023. See section 3 below for the latest update.

The catalyst for today’s surge was the CPI, which came in at 3.2%, lower than the 3.3% expected, while the monthly CPI was flat (0.0%), below the consensus of a 0.1% increase, and much lower than last month’s 0.4% rise.

The core CPI, which excludes food and energy prices, was also weaker than expected and the slowest in two years.

This sparked optimism in the market that the Fed could finally put an end to its rate-hiking cycle for good. After the report, fed-funds futures showed that traders eliminated any chance of a hike in December, from 14% odds before, which sent the market soaring.

A tweet by Fed insider Nick Timiraos, aka Nikileaks, confirmed that the Fed is now done with its hiking spree.

The 10-year Treasury yield, which spooked stock investors by jumping over 5% in October, plunged to 4.44% after the soft inflation report. Traders are convinced that the Fed’s last rate hike was indeed in July.

While this news ignited bullish sentiment, some analysts warn that inflation is far from being tamed and will likely pick up again soon. Bloomberg’s macro strategist Simon White points to the following factors:

1. Large fiscal deficits are boosting corporate profits, which are now the main driver of corporate prices.
2. A rebound in goods inflation reinforcing high services inflation.
3. Rising price growth in China that will spill over to global inflation pressures.

I agree with him, but for now, caution is out the window, and this bear market bounce could turn into a new bull market. Even bank stocks jumped on the hope that the economy could avoid a recession.

Bond yields dropped, as the dollar had its biggest daily decline since November 11, 2022, and the most shorted stocks were squeezed. As the dollar tanked, gold soared and is again heading towards its $2k level.

ZeroHedge reported that on average it takes about 8 months from the last rate hike to the first rate cut. Does that mean March 2024 is when the Fed will finally give the market what it wants?

Or will it be too late by then?

1. Moving the markets 

U.S. stocks wandered around like lost sheep today, apparently unfazed by Moody’s Investors Service cutting its U.S. credit rating outlook to negative from stable on Friday. The downgrade reflects the U.S.′ “very large” fiscal deficits and the political deadlock in Washington that prevents any meaningful action. The ratings agency still gave America an AAA rating, the highest level, but for how long?

This follows Fitch’s downgrade of the U.S. long-term foreign currency issuer default rating to AA+ from AAA three months ago, for similar reasons.

Treasury yields rose briefly and then fell back after the outlook change. The 10-year yield dropped 1.6 basis points to 4.627%. It seems that investors are either ignoring the Moody’s downgrade or are more worried about other things happening this week.

The main event is the consumer price index data for October, a key measure of inflation that the Federal Reserve watches closely. The data, due on Tuesday, will give us a clue about the state of the U.S. economy before the Fed’s December meeting. Right now, the odds of a rate hike at that meeting are slim to none.

The dollar weakened, gold rebounded, and crude oil climbed higher for the second day in a row. Bond yields have been rising lately, defying historical patterns. But that may change as U.S. foreign credit risk has increased with the downgrade.

Will foreign investors ask for higher yields to lend us money for our growing debt?