Market rides inflation surprise

Inflation numbers have tripped up the market more than once over the past several months. But last week they helped fuel its biggest one-day rally in more than two years, and its fourth-strongest week of 2022.

A day after stocks pulled back sharply in the wake of the midterm elections, the S&P 500 (SPX) notched its biggest up day since April 2020 after the Consumer Price Index (CPI) came in below expectations and showed inflation rising at its lowest year-over-year pace (7.7%) since January. The move pushed the index to its third higher swing high since mid-October:

The headline: Market rallies as investors embrace inflation downtick.

The fine print: Last Thursday’s big moves weren’t limited to stocks. Gold hit a 10-week high, the US dollar posted its biggest down day since 2015, and 10-year T-note yield fell 31 basis points, from 4.15% to 3.84%—its largest one-day decline in more than four years. Also, the probability that the Fed would raise interest rates by 0.5% in December jumped to 85%, up from 61.5% a week earlier.¹

The scorecard: Tech led the Thursday market surge, handing the Nasdaq 100 (NDX) its biggest weekly gain of the past two years:

Sector roundup: The strongest S&P 500 sectors last week were information technology (+10.1%), communication services (+9.3%), and materials (+7.9%). The weakest sectors were utilities (+1.5%), health care (+1.8%), and energy (+2.2%).

Stock movers: On Monday Veru (VERU) +40% to $14.44 on Monday, Merrimack Pharmaceuticals (MACK) +213% to $12.51 on Wednesday. Chart Industries (GTLS) -36% to $154.31, and Emergent BioSolutions (EBS) -35% to $12.85, both on Wednesday.

Futures: December gold (GCZ2) posted its biggest one-week rally of the year, closing Friday at $1,769.40/ounce. December WTI crude oil (CLZ2) fell to a two-week low of $84.70 on Thursday, but rebounded on Friday to end the week at $88.96/barrel. Week’s biggest up moves: December palladium (PAZ2) +10.2%, January platinum (PLF3) +8.7%. Week’s biggest down moves: November Micro ether (ETHX2) -25.9%, November Micro bitcoin (MBTX2) -23.6%.

More inflation data, retail sales, and leading indicators highlight the week’s economic calendar:

●Monday: NY Fed Inflation Expectations
●Tuesday: Producer Price Index (PPI), Empire State Manufacturing Index
●Wednesday: Retail Sales, Housing Market Index
●Thursday: Housing Starts and Building Permits
●Friday: Existing Home Sales, Leading Indicators Index

Retail earnings take center stage this week:

●Monday: Monday.com (MNDY), Tower Semiconductor (TSEM), Tyson Food (TSN)
●Tuesday: Advance Auto Parts (AAP), Home Depot (HD), Walmart (WMT)
●Wednesday: Target (TGT), TJX (TJX), Lowe's (LOW), NVIDIA (NVDA), Williams-Sonoma (WSM)
●Thursday: Palo Alto Networks (PANW), Alibaba (BABA), Applied Materials (AMAT), BJ's Wholesale Club (BJ), Kohl's (KSS), Gap (GPS), Keysight Technologies (KEYS), Macy's (M), Ross Stores (ROST)
●Friday: Buckle (BKE), Spectrum Brands (SPB), Foot Locker (FL)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Before the CPI report transformed last week’s market action, the midterm elections had dominated the news cycle.

Wednesday’s pullback may have been partially due to a lack of resolution: When traders and investors woke up, control of the House and Senate were still up in the air, with too many races too close to call. Uncertainty, political or economic, is rarely the market’s friend.

Nearly a week later, Congress is still, technically, up for grabs. But the growing consensus is that Republicans will have a small majority in the House, which makes control of the Senate a moot point in terms of creating a “divided government”—one where different parties control the White House and at least one branch of Congress.

And as Morgan Stanley & Co. analysts explain, a divided government may be more market-friendly than one controlled entirely by the Democratic party, since the latter was more likely to result in government spending programs with the potential to feed inflation and keep the Fed on a hawkish path.²

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¹ CME Group. FedWatch Tool: Target Rate Probabilities for 14 Dec 2022 Fed Meeting. 11/11/22.
² MorganStanley.com. The Midterm Elections’ Market Impact. 11/10/22.