Inflation Still Heated, But Core CPI In-line!

Though CPI (+0.4%) MoM was above the expected +0.3%, Core CPI (+0.3%) remained in-line with expectations

According to data from the Bureau of Labor Statistics, the core consumer price index (CPI), which strips out food and energy costs, rose by 0.3% in September. This core CPI is regarded by economists as a superior indicator of underlying inflation dynamics compared to the overall CPI, which saw a 0.4% increase largely spurred by energy costs.

Recent inflation data reflects the impact of a robust labor market on bolstering consumer demand, potentially maintaining price pressure above the Fed’s target. At their latest meeting, most officials identified the need for an additional interest rate hike this year, a stance they might continue to hold unless inflation shows signs of easing, despite the recent bond yield surge.

However, comments by several Fed representatives hint at a possibility of the central bank maintaining steady interest rates in its upcoming November 1 meeting, suggesting that more hikes might not be required.

Despite the notable decline in used cars and motor vehicle parts, the rise in prices was most evident in areas like housing costs, car insurance, and recreational services, which include sports event tickets. Shelter costs, contributing about a third to the overall CPI index, were responsible for over half of the monthly advance, boosted notably by a massive surge in hotel stays. For the downward trajectory of core inflation to continue, it’s critical to maintain consistent moderation in this category moving forward.

Initial Jobless Claims: Short Term Drag, Long Term Tailwind

Sure, the spike in yields might have a bit of a drag on stocks in the short term, but let’s not miss the forest for the trees. There’s a lot to be positive about: strong jobs data, a rising participation rate, and a lid on wage pressure. That’s all good news for the equity markets. We’re remaining sensible and hedging against tactical risks, but the blend of solid growth, a robust labor market, and fewer inflation worries still tips the scale toward long equity exposure. But, we’re not turning a blind eye to a few potential risks: the Fed’s labor market moves, the prospect of higher terminal rates — which are practically knocking on our door — and potential shakeups in the credit and real estate sectors.

On the jobs front, it’s been a steady drumbeat of low initial jobless claims these past few weeks — music to the ears of anyone rooting for the economy. And, it’s worth celebrating that a cool 336,000 jobs were added in September. The labor market is tight, which is a good sign. We’re looking at a small bump in initial claims to around 211,000 from 207,000 for the week of October 7th, but we’re still talking low numbers here.

As for continuing claims, they’re staying pretty low, too. They’ve crept up a little since last year, but that’s not too concerning. A bit of seasonality in the mix suggests we might see these continue to rise in the coming months. We’re anticipating an uptick to around 1,695,000 from 1,664,000 for the week of September 30th. All in all, it’s an interesting game, so stay tuned!

FOMC Minutes: Fed Done with Hiking Rates!

The minutes from the September 20th FOMC meeting aligned with market expectations and brought an optimistic outlook for markets and equities. A key takeaway was the upward adjustment to the Federal Reserve’s “dots,” an indication of a hawkish stance. However, this was well balanced by the emphasis on the now restrictive policy rates and the call for any future rate hikes to be implemented with caution.

The outlook suggests only a significant positive surprise in CPI inflation could prompt an immediate rate hike in November.

While further hikes can’t be ruled out for later this year or next year, the decision bar has been set higher, suggesting a more cautious approach that’s generally favorable for markets. Despite robust GDP growth projections, the Fed officials are foreseeing eased growth and inflation, a perspective that can stabilize market expectations. The focus now is not on hiking rates, but on how long to maintain them at restrictive levels, until there’s confidence of sustainable inflation reduction. The recent positive job data and averted government shutdown have been balanced by rising concerns over swift escalation of long-term interest rates. This cautious and balanced approach by the Fed, coupled with the anticipation of holding rates steady until the potential recession next year, projects a stable and positive environment for markets and equities. However, the situation remains dynamic, and the possibility of hikes persists should inflation and real activity data dictate so.

Markets Shrug Off War: Still Bullish for BTC

History usually offers a good lesson for financial markets. This is an interesting reminder.

US stocks have largely shrugged off past geopolitical conflicts. In spite of the severity of any geopolitical escalation, past instances have shown us that such events are unlikely to significantly disrupt US economic fundamentals or corporate earnings.

Take, for example, the US airstrike in January 2020 that led to the demise of Iranian General Qasem Soleimani.

The event reinforced the lesson not to sell stocks in response to such incidents, as historical evidence suggests that stocks have successfully navigated through heightened geopolitical tensions.

Highlighting the surprising resilience of the market during turbulent times. From the start of World War II in 1939 until its culmination in late 1945, the Dow saw an increase of 50%, amounting to more than 7% annually. So, throughout two of the most devastating wars in modern history, the U.S. stock market demonstrated a combined surge of 115%. This underscores the point that the relationship between geopolitical crises and market outcomes is not as straightforward as it may appear at first glance.

War = Risk On

S&P 500 Index Price From When Russia Invaded Ukraine to a Month Later

Following Russia’s invasion of Ukraine on February 24, 2022, global markets, including the U.S.’s S&P 500 index, initially dropped over 7% due to increased economic sanctions on Russia and concerns over commodity prices. However, despite the ongoing elevated oil prices exceeding $100 a barrel, markets rebounded within a month, with the S&P 500 trading at levels above those prior to the invasion.

Yields rising = Defensives underperform

War + Rising yields = Growth outperforms

Digital Gold: BTC considered “Safe Haven” during Political Unrest

The relationship between gold and Bitcoin (BTC) as value reserves is evident. Bitcoin’s rise in popularity owes much to its demand as a digital asset. With a market capitalization of $540 billion, Bitcoin accounts for around 10.8% of physical financial gold’s market cap. Gold exchange-traded funds (ETFs), on the other hand, are valued at $200 billion.

This forms the basis for the perspective that the Securities and Exchange Commission (SEC)’s potential approval of a U.S.-listed spot Bitcoin ETF could lead to an influx of $20 — $30 billion. This could, in turn, spark a significant rally in the cryptocurrency. While the SEC has been slow in giving the green light to a spot Bitcoin ETF, deferring decisions on new applications until October, the crypto market is optimistic that such approval could usher in a wave of mainstream investment in the sector.

Bitcoin holds an advantage over gold in that the private keys can be committed to memory, thereby eliminating the risk of confiscation, as noted in the report. With the digital age rendering the storage of assets in the form of gold somewhat outmoded and border crossings with gold subject to restrictions, Bitcoin offers an effective solution. It allows for the quick and discreet transfer of value across borders.

Thus, in light of the current technological landscape, Bitcoin’s primary roles appear to be a store of value comparable to gold and a speculative financial asset.