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A Very Volatile Morning For Stocks

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In his Daily Market Notes report to investors, Louis Navellier wrote:

CPI comes in right on the estimates – stocks volatile but keeping this week’s gains.

Powerful Rent

The run-up in stocks recently on expectations of a soft CPI is being confirmed today when the number came in as forecast. Core CPI, the more important number, came in at 0.3% for December as forecast.

This was above the 0.2% of November and the same as October, but well below the 0.6% of September and August. The headline CPI, forecast to be flat for December did come in -0.1%, the first actual decline since May ’20.

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A powerful component in the numbers is shelter (rent), which is nearly a third of the calculation, coming in at +0.8%. This is a smoothed number incorporating more historical data in order to suppress volatility.

Current data sees rents leveling and in some areas falling but we will only see this trend phased into the calculation in the months ahead. It's essentially been below actual trends in the recent past and is now overstated today.

In the end, inflation trends are falling but still far from the Fed's Goldilocks 2% target with the y-o-y headline CPI still 6.5% and Core CPI 5.7%. But the numbers are low enough that the odds for the Fed increasing 50 bps next month are now less than 10%. Indeed, the Fed rate outlook now peaks at 4.9% in June '23 and is forecast to fall to 4.4% in January '24.

Volatile Morning

The market does not believe the Fed's insistence that they will actually go above 5% and stay there for an extended period. This is best reflected in the US 2-year yield, down 6bps to 4.15% (after dipping as low as 4.11% today) which is as low as it's been since early October '22, many Fed rate increases ago. The US dollar index is also lower, down to 102.6, hitting 102 at one point, the lowest since June '22.

Stocks have been very volatile all morning as they digested the implications, with the S&P going as high as 3,981, then falling to 3,937, and then climbing all the way back. Gold and copper are both up and both have demonstrated volatility similar to stocks on the day. Crude oil is up above $78, and natural gas is modestly higher at $3.80.

The VIX has now dropped below 20 and the majority of international equities are having a solid positive day. The volatility continues as the day goes on with the indexes flipping from modest gains and losses, though the Dow and Russell are consistently in the green.

Recovery Underway

While the big rally hoped for hasn't transpired, we are hanging on to the gains of the week and the CPI is behind us. The S&P is up 3.95% year to date, 152 points, the NASDAQ is up 5.3%, 554 points, the Dow +3% +1,006 points, and the Russell +6% +105 points.

The recovery from the worst year in a long time is well underway. Now we're on to the earnings season to hopefully confirm that a soft landing is in the cards.

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