Why is the Market Ripping Higher on the HIGHEST Inflation?
The market is very strong as I am writing this newsletter. The Open was slow and choppy but I managed to execute a quick scalp and book some decent profit. You can watch the recap that Brian and I posted here.
Peter held an excellent webinar last night on How to Take SMART Trade Entries. The webinar was well attended and it is ready for viewing by all Elite members. Make sure to check it out in our Education Center.
Inflation is the only thing that is driving the market these days and it’s been a busy week for the release of inflation data. US consumer prices rose in March by the most since late 1981, while UK inflation surged to 7% last month, a fresh three-decade high. Some Federal Reserve governors were quick to react, mentioning that the Fed needs to raise rates faster or risk its credibility. The inflation wave has reached Asia, with signs that the worst is yet to come. Additionally, New Zealand’s central bank’s biggest hike in 22 years sent a global warning to their policy makers. Everybody is expecting fast interest rate hikes to fight inflation, and more and more traders are expecting a 50 basis point interest rate hike during this May’s Fed meeting.
It is clear that the high valuation of stocks and bonds are finally catching up with our bull market. The state of the economy and these high valuations are now in question. Earnings season could offer clues, with bank results kicking off today as JPMorgan reports. Big US lenders are expected to post weaker deal revenue amid the war in Ukraine and underwriting headwinds are also seen to be dragging revenue lower.
As I noted above, the market is ripping higher and the Tech Sector ETF QQQ is up over 2%. What is happening in the market? The inflation report came in as the highest in 41 years, at 8.5%, higher than it was estimated to be. Nonetheless, why is the market ripping higher now? Here are some of my general thoughts (and in no particular order).
1) The first positive point to stress is the lower-than-expected core inflation reading. It’s been some time since any inflation reading anywhere really surprised to the downside. That is good news.
2) Services inflation continues to increase but it is unlikely that it can carry on. I sense it will be apt to cool down in the coming days and weeks. Airfares have been contributing much to inflation. They in fact have jumped over 10% in the past month. My flight last week from London to Vancouver was unbelievably expensive: $2,000 for economy and $8,000 for business class. Obviously, I flew economy! However, the good news is that it is doubtful that something such as the jump in airfares will be repeated, given the volatility of that category. Demand will very soon catch up with such high inflation in services.
3) We may see some relief on inflation going forward, thanks to the recent pullback in oil prices. Part of the reason for the retreat in oil prices is the release of oil from the US Strategic Petroleum Reserve and the hard lockdowns in China, both of which have put a crimp on oil demand.
4) Finally, a very important survey from the NY Fed came out this week, and it will hopefully get some attention. The report shows a big jump in inflation expectations over the next year (from 6% to 6.6%). However, the three-year expectations actually fell from 3.8% to 3.7%. Accordingly, it does not seem that people are actually worried about significant inflation over the long term, at least based on this report
These factors may very well be an explanation for the recent surge in the equity market and the accompanying volatility that it is bringing to us. I’m certain we are all grateful for this volatility. I personally booked over $100,000 in the last few days!
As for the news headlines regarding the war in Eastern Europe, the US is preparing a military assistance package of roughly $750 million for Ukraine. Since Biden took office, the US has provided more than $2.4 billion in military assistance to Ukraine, with $1.7 billion of that coming after Russia’s invasion. The presidents of Poland and the three Baltic states are heading to Kyiv in a show of support. As well, Vitol Group, the world’s top independent oil trader, intends to completely stop trading Russia-origin crude and other petroleum products by the end of this year.
It’s a very interesting time to be alive and to be a trader. I myself look forward to trading each morning. I hope you do too.
I must also add, aside from trading, I enjoy spending time with you in our chatroom every morning as well as in our webinars and mentorship sessions. If you have not already, please take advantage of our “Hello Spring” promotion and join with us. You’ll receive full access to everything our community offers. You will find more information here.
To your success,
PS1: Don’t forget to try out our free web-based trading simulator at stocktradingsimulator.com. It’s conveniently available 24/7, whenever you have time to practice honing your trading skills.