US inflation

Today’s print is a good reminder that markets are far from predictable.

CPI surprised once again on the upside, relative to consensus. That’s bad.

The market has become laser focused on inflation, because it knows the Fed will not relent on monetary policy tightening, until there is some clear evidence that inflation is on its way back to target.

This data print would suggest is hasn’t even finished peaking, let alone plateauing.

Initially, the market sold off heavily, however, famously fickle, it rallied, and subsequently was up strongly to finish, a risk on mood that also drove the ASX today. Today’s rally is scarcely visible against the broader market moves of the past few months, but it was strong nonetheless.

It’s a good reminder of why it never pays to be “too bearish” even in response to bad news. If the bad news is still better than the marginal investor positioned for, stocks rally.

Will stocks continue to rally from here? No idea, short run. A “Santa rally” could well be on the cards.

Time for a bit of nuance. We’ve been underweight risky assets relative to our DAA, and broadly neutral risk relative to the median manager. As markets fall we’ve been adding.

However, if the market rallied some number (to put one on it, say the US S&P 500 “wipes back on” the 9% it lost last month) we’d be inclined to fade the rally.

We absolutely think inflation will return to trend, but if it is returning to trend only after the Fed pushes the cash rate to 5%, well, that’s an environment to sell, not to buy.

Restated; had CPI gone down “immaculately” today, with signs of pressure abating, we’d be looking to buy.

Since it didn’t, if the market gets too excited, we’ll fade that strength.

With a whipsawing market, one has to be prepared to be nimble.

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