1. Moving the market

Following Friday’s significant gains, the S&P 500 opened with a surge and reached another record high, driven by anticipation of positive earnings reports, despite the bond market being closed for Columbus Day.

Rumors from China about a new stimulus plan (quantitative easing) laid the groundwork for today’s market action, propelling both equities and cryptocurrencies significantly higher.

Major banking institutions like Bank of America and Goldman Sachs are set to report on Tuesday, following the positive earnings reports from JP Morgan and Wells Fargo.

These initial reports indicated a recovery in banking profits, with the 30 S&P 500 companies that have reported so far exceeding consensus estimates by an average of 5%, compared to a 3% beat in the previous quarter, fueling the current market enthusiasm.

However, several potential risks loom on the horizon, including the upcoming election, rapidly rising bond yields, geopolitical tensions in the Middle East, and uncertainties about the Federal Reserve’s future easing policies.

The MAG7 basket of stocks continues to push towards June’s all-time highs, with Nvidia achieving a new record and closing in on Apple’s market cap lead.

The most shorted stocks experienced a squeeze higher, while bond futures suggest lower prices and higher yields.

Bitcoin soared past $66,000, reaching its highest level since September, as the dollar climbed to a two-month high. Despite the dollar’s strength, gold remained stable within its recent trading range.

Although the VIX (volatility index) pulled back slightly, we are in a seasonal period where market conditions can change rapidly. Bloomberg noted that traders are hedging their positions more aggressively than in the first half of the year.

1. Moving the market

The major indexes retreated from their elevated levels as rising inflation and unemployment provided traders with a sobering reality check.

Despite these concerning figures, the pullback was moderate, even though they suggest potential stagflation—characterized by higher inflation coupled with stagnant or slow economic growth.

Core consumer prices, a key metric favored by the Federal Reserve, increased by 0.3% month-over-month, surpassing the expected 0.2% and marking the strongest reading since March. Year-over-year, this resulted in a rise of 3.3%, slightly above the anticipated 3.2%.

The headline Consumer Price Index (CPI) also climbed, with the year-over-year figure reaching 2.4% compared to the expected 2.3%. This indicates that CPI has been accelerating over the past two administrations, with a more pronounced increase in the last four years.

Food inflation has been relentless, showing a staggering growth of 22.5% over the past four years.

Bucking the day’s trend, Nvidia gained over 1.6% during the session. Bond yields were mixed, the dollar rallied for the eighth consecutive day, and gold prices also rose, recovering from a recent dip.

However, Bitcoin faced a bearish session, dropping below the $60,000 mark, while crude oil surged, reaching $76 on an intraday basis.

Given these developments, it seems inflation might remain a persistent issue. Could we be on the verge of experiencing an inflation scenario reminiscent of the 1970s?

1. Moving the market

The markets attempted to build on yesterday’s recovery, with major indexes starting the day on a positive note.

This momentum was boosted by the release of the Federal Reserve’s September meeting minutes, which revealed that most participants favored a larger 0.5% rate cut over a more modest 0.25%. This news fueled bullish sentiment, leading to a strong market performance, with the Dow taking the lead and the S&P 500 reaching another all-time intraday high.

Overnight, however, China’s indexes declined, with their large-cap ETF dropping 2% following the previous day’s sharp selloff.

Wall Street’s recovery on Tuesday was driven by gains in the tech sector and a significant pullback in oil prices, which continued into today. Traders remain optimistic that the Fed can achieve a soft landing, a view primarily supported by last week’s headline jobs report showing continued strength in the labor market. However, a closer examination of prior revisions suggests this optimism may be misplaced.

The MAG7 basket continued its recovery from Monday’s plunge, while bond yields rose again, with the 10-year yield closing at 4.077%, well above the critical 4% level.

The dollar maintained its upward trajectory, reaching its highest point since August. This strength in the dollar weighed on gold and Bitcoin prices, both of which slipped, with Bitcoin testing the $61,000 level. Crude oil also retreated from Monday’s high.

Meanwhile, the U.S.’s foreign default risk reached its highest point since December, and despite the Fed’s rate cut, mortgage rates surged back up to nearly 7%, offering no relief to homebuyers.

Go figure…