Inflation Cools, Yields Down, Stocks Rise

Charlie Munger has died aged 99.

Some classic quotes:

"When you’re dealing with something as awful as crypto shit, it's just unspeakable. I’m ashamed of my country that so many people believe in this kind of crap and the government allows it to exist."

And; "I'm proud of the fact that I avoided it. It's like some venereal disease. I just regard it as beneath contempt. Some people think it's modernity, and they welcome a currency that's so useful in extortions and kidnappings [and] tax evasion."

And; “…I just try to avoid being stupid. I have a way of handling a lot of problems — I put them in what I call my ‘too hard pile,’ and just leave them there. I’m not trying to succeed in my ‘too hard pile.’”

Back in the Markets

Stocks were up a decent amount on Wednesday after a more positive session on Tuesday for Wall Street and some inflation data from the Eurozone. The S&P 500 edged up 0.1%, whilst the Nasdaq added 0.3% for the day, reversing modest losses on Monday. It keeps the major indices on for their best month since July 2022 and one of the best months for the broad market in the last decade. Treasury yields declined further with the 10yr to 4.250%, its lowest in more than two months, helping gold to break out further and move closer to challenging the all-time highs. The 2yr Treasury yield fell 12bps to its lowest since July. Given the inflation and the amount of money printed and the way rates are peaking and CBs seen pivoting you can see gold peaking afresh. Oil prices continue to chop around but trends a bit firmer with the OPEC+ meeting ahead tomorrow – quite a sharp bounce off the Monday lows yesterday indicating hope for agreement and more cuts.

European Markets Respond Positively to Deflationary Indicators

The DAX rallied sharply at the open to rise 130pts, hitting its best since the start of August, with German inflation due out this morning and early signs pointing to disinflation. Spain November preliminary CPI +3.2% vs +3.7% y/y expected – cooler than expected. North Rhine Westphalia’s inflation also declined to 3.0% from 3.1%...good signs the ECB is done…yields are down again on the EZ inflation reports early doors…German 2yr to 2.83% and the 10yr to 2.45%, lowest since start of September…markets now price in about 100bps of cuts by the ECB next year. European shares were broadly higher on the decline in yields with the FTSE 100 falling behind, shedding a third of a percent in early trade with some heavyweight financials, energy and defensives weighing on the market – HSBC and Shell shaving about 16pts off the index in early trade.

Central Banks

Fed Governor Christopher Waller confirmed the market’s belief that the US central bank won’t hike again. He said “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough”. The comments were read as indicating a pivot is ahead, particularly as he is a hawkish voice at the central bank. This comes ahead of the blackout period before the Federal Open Market Committee’s policy meeting on Dec. 12-13. Markets now price in a 70% chance of a Fed cut in May…too much too soon.

Other central bankers are on the wires a lot this week. BOJ board member Seiji Adachi said it was premature to debate an exit from negative interest rates; almost the exact message from Bank of England governor Andrew Bailey. Australia Inflation for October gives the RBA reason to pause, slowing to 4.9% from 5.6% last time and against a forecast 5.2%.

Dollar's Downslide: Awaiting FOMC's Cue

The dollar declined further, with DXY futures to the weakest since the middle of August with the 103 support cracked it’s opened up 102.20 as the next level to test. Overnight we saw it hit a low of 102.36 before paring losses a bit. Broad dollar weakness has spurred further gains for major peers – cable to $1.2730 overnight and EURUSD breaching the 1.10 level. USDJPY has taken a 147 handle – normalisation could be the big trade next year.

On SPX – GS notes it’s not uncommon to see 3-4% pullbacks after the rally we just witnessed (+10%), whilst also focused on the fact despite the fact that index concentration is near the highs, index implied correlation is at all-time lows.

Chart suggests signs of pause – pullback ahead of the FOMC? Yields have made quite a sharp break lower and this may correct a bit and drag stocks into a similar move.