Wall Street picks hope over reality… again – CNN

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New York CNN Business  — 

Stocks surged on Thursday in their best day since 2020 after a key inflation indicator came in softer than expected. Investors broke out their party hats as they interpreted the report to mean that peak inflation may finally be behind us. That means the Federal Reserve could be less aggressive with its rate hikes.

But Wall Street’s memory is short: Less than two weeks ago Fed Chair Jerome Powell unambiguously said rates would remain higher for longer. Investors may be in for another letdown as sustained price pressures in housing, wages and energy mean the central bank still has a long way to go in its battle against inflation.

What’s happening: The Consumer Price Index rose 7.7% for the year ending in October, a much slower pace of increase than the 8% economists had expected and the lowest annual inflation reading since January.

While Fed Chair Jerome Powell said earlier this month that the central bank still has “some ways to go” in its battle to tame inflation, sentiment is growing that the Fed may pivot and ease its current regime of historically high rate hikes to fight growing prices.

As of Thursday afternoon, markets were pricing in an 80% chance of a half-point rate increase at the Fed’s December policymaking meeting. That would represent a deceleration after a run of four consecutive hikes of three-quarters of a percentage point.

But investors have a knack for getting their hopes up about a central bank pivot only to be crushed by another piece of negative data or hawkish messaging from a Fed official.

“The market’s short-term reaction may be strong, but this is only one month’s data,” warned Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “This entire year has seen the market careen from one narrative to the next. While the October CPI data may help to soften the Fed’s trajectory a bit, it would take a lot more in coming months for the Fed to make an actual dovish pivot rather than stick to its ‘higher for longer’ recent messaging.”

The inflation rate still remains far above the Federal Reserve’s 2% target, and the pace at which inflation is declining is still very slow.

“Like an athlete running in a marathon, the Federal Reserve’s attempt to bring inflation down toward its 2% target requires some patience, but importantly, moving forward matters even if it’s early on in the race,” said Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income.

It’s not all bad news: The first mile in a marathon matters. The latest report bodes well for the economy and could mean that a soft or soft-ish landing, where inflation eases without recession, is still achievable. That’s also good for markets.

“If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller,” wrote Bill Adams, chief economist for Comerica Bank in a note.

What’s next: This is just one report in a crowded landscape of economic data. But if inflation continues to moderate in November, that could be enough to convince the Fed to ease its rate of hiking.

Nowhere for investors to hide

It’s been a terrible year for cryptocurrency. The value of Bitcoin has dropped nearly 75% since last November and the spectacular implosion of cryptocurrency exchange FTX, a so-called unicorn startup that was recently valued at $32 billion, is just the latest bit of bad news for investors in digital currencies.

Crypto-advocates were hoping that rising interest and inflation rates would drive investors away from the dollar and into alternative assets like gold and Bitcoin. They’ve been in for a rude awakening this year, reports my colleague Paul R. La Monica.

Unfortunately, those assets have gotten hit just like stocks and bonds, proving there really is no place to hide in a market where worries about rate hikes and recession reign supreme.

Gold prices have also fallen this year, though not nearly at the same rate as digital currencies. They’re down by about 6%.

A crypto thaw: Bitcoin soared through the Covid-era on the wings of near-zero interest rates, stimulus cash and a big influx of investors from large-scale institutions. It reached a record high of nearly $70,000 in November.

Then, central banks started raising rates to fight inflation, and the dollar strengthened significantly, seducing investors as the ultimate safe haven. At the same time, the economy began to sour and those new investors who still viewed bitcoin as a risky asset exited in droves.

This isn’t the first time that there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they have still done better than many major stock market indexes.

Just look at bitcoin prices since the summer of 2020. They’re up more than 80%…even though it has been far from a smooth ride. The Nasdaq, by way of comparison, is only up about 1% from July 2020 levels.

“Bitcoin and ethereum went straight up and down but they have still gained a lot from mid-2020. Over that longer time horizon, digital assets are still outperforming tech stocks,” said Jeff Dorman, chief investment officer at Arca, a firm that specializes in crypto.

More mortgage madness

Bad news for potential home buyers: Mortgage rates have once again jumped back above 7%, after a slight drop last week.

Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s regime of interest rate hikes. Last week, the Fed announced it would raise interest rates by another 75 basis points, the sixth rate increase this year and the fourth-consecutive hike of that size.

“The housing market is the most interest-rate sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve,” said Sam Khater, Freddie Mac’s chief economist. “Home sales have declined significantly and, as we approach year-end, they are not expected to improve.”

The bottom line: With mortgage rates up four percentage points from a year ago, buyers’ purchasing power has plummeted. That has pushed many buyers out of the market and those who remain may need to look at a lower price point or make compromises on the location, size, or condition of a house in order to find one that is affordable.

Because of this drastic change in the cost to finance a home, sales have dropped for eight months running, according to the National Association of Realtors. A survey from Fannie Mae showed that only 16% of people think this is a good time to buy a home, a record low.

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