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Stocks had a sluggish day yesterday, with the S&P 500 essentially staying within the previous day’s trading range. It managed to close the session up about 40 basis points. Interestingly, the index opened higher yesterday but the highs from the day before remained intact, for now.
It seems that we may merely be waiting on the CPI report that is due later today. The estimates are for a m/m increase of 0.3%, down from 0.6% in August, while rising by 3.6% y/y, down from 3.7% in August. Core CPI is expected to climb by 0.3%, in line with August, while falling to 4.1% down from 4.3%.
CPI swaps are pricing a 3.55% increase in the headline y/y change, basically in line with analysts’ estimates.
At day’s end, the S&P 500 straddle was only pricing in a 75 bps move by the end of the day today, which doesn’t seem like much given the inflation report. Perhaps that is because the Fed minutes today implied that the Fed is probably done at this point.
There is always a chance for one more rate hike, but from reading through the minutes, it sounds like the odds favor them being finished hiking rates, barring a surprise.
S&P 500 Index-Odds
It seems that the Fed is content with policy where it is; instead, it is shifting its focus on the length of time that rates will remain at these levels. Which I would imagine is going to be high for some time. Of course, that will depend on the neutral rate of the economy and whether the policy is restrictive enough.
Based on the minutes, it doesn’t seem clear they actually know what the neutral rate of the economy is, and at this point, they seem to be feeling their way through a very dark room. Given that the Fed has raised rates about 550 bps over the past 18 months and real GDP in the third quarter is expected to advance by a real 4.9% and 8.9% nominal rate, I find it hard to believe the Fed is restrictive enough.
Stocks Rally Post Fed Minutes
Meanwhile, stocks rallied a bit after the minutes’ release. However, the index could not surpass the day before yesterday’s highs and could only get back to its early morning highs. So, at least at this point, we have a 78.6% retracement of the day before yesterday afternoon’s sell-off, and yesterday’s late rally could be a 78.6 extension off of the 2 PM ET lows. So today’s data and market reaction may take on some extra level of importance.
S&P 500 Index Chart