1. Moving the markets

U.S. stocks ended lower on Thursday, snapping a four-day winning streak, as investors digested the latest inflation data and a dismal bond auction.

The consumer price index (CPI), a key measure of inflation, rose by 0.4% in September and 3.7% year-over-year, beating the consensus estimates of 0.3% and 3.6%, respectively.

The core CPI, which excludes volatile food and energy prices, matched the expectations of 0.3% monthly and 4.1% annual increases. The inflation data followed a stronger-than-expected producer price index for September, which showed a stronger-than-expected producer price index for September.

The inflation numbers spooked the bond market, sending the yields on the 10-year Treasury note soaring by more than 14 basis points to 4.705%, near its intraday high. The catalyst for the yield spike was a terrible 30-year bond auction, which had the highest yield since 2011.

The bond market rout dragged down the stock market, as higher yields make equities less attractive and raise borrowing costs for companies and consumers.

The sell-off was broad-based, but especially hit the most shorted stocks, which plunged and erased their gains for the year.

Crude oil prices were flat, despite the ongoing conflict between Israel and Hamas, which raised fears of a supply disruption in the Middle East.

The dollar rallied on the back of rising yields, while gold prices gave up their earlier gains. Financial conditions eased, despite the Fed’s recent announcement that it was happy with the market’s tightening response.

Will the Fed change its course if inflation persists, and bond yields continue to surge? How will the stock market react to the Fed’s next move? These are the questions that traders will be asking themselves in the coming days.

1. Moving the markets

Stocks went up on Wednesday as investors shrugged off the latest inflation scare and celebrated a big deal in the oil industry (Exxon swallowed Pioneer Natural Resources).

Treasury yields kept falling from the 16-year peaks they hit last week, which gave stocks a boost after a midday slump. Another factor that helped stocks bounce back was the easing of financial conditions in the past few days, as the Middle East turmoil sent investors running for the safety of bonds.

I wonder if some hawkish Fed officials will show up soon and talk rates back up again. The producer price index (PPI) climbed 0.5% in September, beating the forecast of 0.3%. This pushed the headline number up by 2.2% year-over-year. That’s the highest annual increase since April 2023 and the third month in a row, as food prices soared to levels not seen since November 2022.

The 10-year Treasury yield dropped even after the hotter-than-expected inflation data, reaching its lowest point since Sept. 29. The 10-year shed more than 9 basis points to 4.569%.

If bond yields keep going down despite rising inflation, I think that will be the main reason for a decent recovery in the stock market. But it all depends on how bad the inflation numbers get.

Tomorrow’s CPI may give us a better idea of where we’re headed. Yesterday’s short squeeze was nowhere to be seen today, the dollar was steady, crude oil cooled off, and gold kept climbing to hit two-week highs.

Minutes from the Fed’s latest meeting due later today will reveal more about the central bank’s plans for raising interest rates after it decided to skip a hike last month.

And tomorrow, it will be all about the CPI which, if worse than expected, could wake bond yields from their dovish nap.  

Will inflation keep spooking the markets or will bond yields come to the rescue?

1. Moving the markets

U.S. stocks went up on Tuesday, thanks to lower Treasury yields and a short squeeze.

Wall Street was busy assessing the geopolitical risks of the Israel-Hamas war, which has been going on for longer than some Netflix shows.

The 10-year Treasury yield ended down 15 basis points to 4.65%, as investors flocked to the safe haven of bonds amid the conflict. The bond market was closed on Monday for Columbus Day, so this was its first chance to react to the war.

The drop in yields gave stocks a boost, as Wall Street was worried about the recent spike in interest rates. Investors may also be ignoring the geopolitical risks caused by the conflict, helped by Friday’s allegedly strong September jobs report and optimism ahead of a bunch of earnings this week.

However, there was a buzzkill in the form of Paul Tudor Jones, the legendary hedge fund manager who said that he doesn’t like stocks right now. He prefers bitcoin and gold, as he thinks the US Treasury can’t protect investors like it used to.

I agree with him, and our Trend Tracking Indexes (TTIs) confirm the uncertainty and instability we are in. The bear market rally of the last few days has only helped investors recover some of their losses, which they suffered after our Sell signal on 9/22/23.

As I write this, I think the market may go up another 1-1.25% before hitting resistance and reversing. The inflation reports tomorrow, and Thursday (PPI and CPI), will likely affect market direction.

The dollar continued to slide, oil prices were slightly lower, and gold was flat but holding on to its gains.

Looking at this chart, it seems that financial conditions are too tight for stocks to be this high. Or is this just a preview of what’s coming soon?

1. Moving the markets

Monday was a day of surprises for the stock market, as it bounced back from a morning slump despite the escalating violence in the Middle East. The bond market took a holiday, leaving investors in the dark about the impact of the Israel-Hamas conflict on interest rates.

The major indexes started the day in the red, with the Dow dropping 154 points at its lowest point, and the S&P 500 and the Nasdaq losing 0.6% and 1.15%, respectively. But by the end of the day, they had recovered their losses and even posted some decent gains.

The market was rattled by the news that Hamas had launched a ground invasion of Israel on Saturday, catching the Israeli army off guard. The conflict could have implications for the energy market, as some analysts predicted a spike in oil prices, but others downplayed its significance. The conflict also added to the market’s anxiety about inflation and rising interest rates, which have been plaguing investors for months.

But what turned the tide for the market was a chorus of Fed officials who hinted that the Fed might be done with raising rates for now. They echoed what SF Fed President Mary Daly said on Friday, that the high 10-year Treasury yields have already done the Fed’s work of tightening financial conditions. Hmm…

If that’s true, and that’s a big if, then we might see a reversal of the recent trend in the market. Rate cuts could be back on the table, and that could boost everything from gold to stocks to crypto. But how likely is that scenario? And how long will it last?

That’s the question that traders will have to answer in the coming days. And depending on their answer, we might find ourselves back in domestic equities again—or not.