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Inflation Numbers & Bulls Domination

U.S. stocks closed higher on Friday, 28th October 2022, with the S&P posting one of its best back-to-back weekly gains since 2009. 

Economic data on the inflation front came in steady on Friday.  

The core personal consumption expenditures price index, considered a preferred inflation gauge by the Federal Reserve, increased 0.5% from the previous month and 5.1% from a year ago. These were in line with expectations. 

Once again, like Friday last, the market posted one of the best reversals not seen in a while. 

Stocks started the day much lower on the back of earnings from Amazon and Apple. This was reversed after the inflation data and never looked back. 

The Dow Jones Industrial Average ended 2.6% higher on for the day, the S&P 500 Index climbed with a 2.5% gain, and the Nasdaq Composite ended up about 2.9%.  

For the week, the Dow was up 5.7%, the S&P 500 3.9% higher, and the Nasdaq up 2.2%.  

Here are the closing levels on Friday, 28th October 2022:

 Last Change %Change 
Dow Jones 32,861.80. +828.52. +2.59% 
S&P 500 3,901.06 +93.76. +2.46% 
Nasdaq Comp 11,102.45. +309.78 +2.87% 
US 10Y 4.01%   
VIX 25.75 -1.64 -5.99% 

Thank you, Bank of Canada. On Wednesday, the Bank of Canada surprised markets with a smaller than expected 50 basis point hike. This move sowed the seed for the market to think that central banks are going to slow down and maybe pivot sooner than expected. 

So, on Friday, with the inflation numbers within expectations, buyers found the courage to believe that the market is ripe for a rally. 

This is in the face of a 75-basis point hike by the ECB and a potential 75 basis point hike by the Fed this week. 

Is the market right or is it an irrational behavior?  

The bond markets suggest that a recession is in the cards with the yield curve inverted. Even 3-month yields are higher than the 10 yr. The case may be fought for a Fed pause if a hard landing is coming.  

But if a recession is coming, why are stock prices rallying?  

One could argue that the recent selling has priced in such a recession and markets are looking forward to the next event of the boom-bust cycle.  

Or could it just be another short squeeze or another computer/algorithmic-driven rally? 

Whatever the case may be, shorts are wounded badly, bulls are in control… for now. 

With the recent big swings from selloffs to rallies it would be hard to predict the next big move.  

Hold on to your hats, the roller coaster ride may not be over. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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