ASX 200 to rise, S&P 500 rallies to 2-month high as US inflation eases to 3.2%

ASX 200 futures are trading 91 points higher, up 1.29% as of 8:20 am AEST.

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S&P 500 SESSION CHART

MARKETS

• S&P 500 opens 1.08% higher, rallies intraday to finish near best levels
• Broad-based rally with only ~20 stocks in the S&P 500 down today
• Yield-sensitive sectors such as Real Estate and Utilities led to the upside
• US 10-year yield down 20 bps to a near 2-month low
• US 2-year yield – Often a good proxy for the Fed’s policy path – Down 22 bps to a 3-month low, reflecting a pull forward in rate cutting expectations
• US 2-year yield marks largest intraday drop since March 2023
• Softer-than-expected US inflation data pushed Fed rate cut odds to ~85% by next June
• BofA Global Fund Manager Survey showed big bullish moves as investors cut cash levels to 4.7% or a two year low
• BofA Global Fund Manager Survey notes 74% of respondents see soft or no landing, 76% say hiking cycle is over and a record 61% expect lower bond yields
• Investors turn overweight equities for first time since April 2022 with 2024 playbook of soft landing, lower rates and weaker dollar (Bloomberg)

STOCKS

• Auto industry expanding efforts to cut rare earth EV use (Reuters)
• Airbnb acquires AI startup Gameplanner.AI for US$200m (CNBC)
• Amazon plans to enable users to buy products advertised on Snapchat (CNBC)
• C3.ai signs strategic collaboration agreement with Amazon Web Services (CNBC)

KEY EARNINGS

• "Similar to the second quarter, we saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories.” – CEO Edward Decker

CENTRAL BANKS

• Narrow majority see BOJ lifting NIRP as the next move (Nikkei)
• BOJ looks to corporate profits, household incomes to boost wages (Reuters)
• Low Eurozone growth may force ECB to ease policy sooner than expected (Reuters)
• BoE to cut interest rates as soon as May, according to economists (Telegraph)
• Fed's Barkin says inflation isn't on a smooth path to 2% (Bloomberg)

CHINA

• PBoC to inject ~$137bn of low-cost financing for housing (Bloomberg)
• China's new bank loans in October fall less than expected (Reuters)
• Beijing orders local governments to cut PPP exposure as debt risk rises (Reuters)
• China stocking up on chipmaking equipment imports (Nikkei)

ECONOMY

• US inflation broadly slows in sign of progress for Fed (Bloomberg)
• US stocks and bonds jump after inflation falls to 3.2% (FT)
• US core inflation hits two-year low (CNBC)
• China activity data forecast to show economy losing momentum(Bloomberg)
• Eurozone Q3 GDP shrinks, Q4 technical recession likely (Reuters)
• German ZEW economic sentiment continues to bounce (Bloomberg)
• Australian consumer sentiment drops following RBA rate hike (Bloomberg)
• UK labor market still showing some signs of resilience (Reuters)

The Biggest Story: US Inflation

A cooler-than-expected US inflation print sent stocks soaring. Here are the key numbers for the October reading:

• Inflation MoM was flat – Below the 0.1% expected
• Inflation YoY eased to 3.2% from 3.7% in September – Below the 3.3% expected
• Core inflation MoM was 0.2% – Below the 0.3% expected
• Core inflation YoY eased to 4.0% from 4.1% in September – Below the 4.1% expected

The key drivers for the cool print include:

• Energy prices fell 2.5% month-on-month after a sharp spike in August and September
• Used cars and trucks prices continued to deflate, down 0.8% month-on-month after a 2.5% drop in September

Core inflation was a slight beat against expectations and remains well-above the Fed's target. The all-important shelter component (which accounts for a third of CPI weighting) is starting to ease.

• Shelter prices up 0.3% month-on-month and up 6.7% year-on-year (from a peak of 8.2% in March 2023)
• Shelter is a lagging indicator that understated housing inflation in 2021 and the first half of 2022 while overstating current prices
• Ongoing decline (or catch up) in shelter has been long anticipated

Sectors to Watch: Green Everywhere

It's a bit of a goldilocks scenario isn't it?

• US inflation was cooler-than-expected
• Yields down, US dollar down and VIX down
• Economic data remains resilient
• The market is bouncing back from extreme oversold indicators and bearish positioning
• CNN Fear & Greed Index is at Neutral (more fuel before things get contrarian bearish)

If you look at our above overnight ETF list – Pretty much everything is green with most sectors up 3-5%. And I think that's all that needs to be said today.

What was once an oversold bounce is now turning into a lockout rally (where things are moving in a V-shaped fashion, making it incredibly difficult to find entries).

Key Events