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Money Market Stocks: Wall Street Expects Reality After Inflation Report



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Inventory spike on Thursday in their best day since 2020 after a key inflation gauge came out softer than expected. Investors took their hats off when they interpreted the report to mean peak inflation could finally be behind us. That means the Federal Reserve may be less aggressive with raising interest rates.

But Wall Street’s memory is short: Less than two weeks ago, Fed Chairman Jerome Powell made it clear that interest rates would be even higher in the long run. Investors may suffer another disappointment as continued housing, wage and energy price pressures mean the central bank still has a long way to go in its fight against inflation.

What is happening: The Consumer Price Index rose 7.7% in the year ended October, a much slower rate of growth than the 8 percent expected by economists and lowest annual inflation reading from January.

While Fed Chairman Jerome Powell said earlier this month that the central bank still has “several ways to go“In the fight to tame inflation, growing sentiment that the Fed can pivot and ease its current historically high rate hike regime to counter rising prices.

As of Thursday afternoon, the market was pricing in an 80% chance of a half-point rate hike at the Fed’s December policy-making meeting. That would represent a deceleration after running four consecutive 3/4 percentage point increments.

But investors have a knack raise their hopes about a central bank pillar only crushed by another piece of negative data or a hawkish message from a Fed official.

Yung-Yu Ma, investment strategist at BMO Wealth Management, warned: “The short-term market reaction could be strong, but this is just one month’s worth of data. “This whole year has seen the market interested from one story to the next. While the October CPI data may help reduce the Fed’s trajectory a bit, it will take more time in the coming months for the Fed to deliver a realistic dovish pivot rather than sticking to the recent message of ‘high’. more for longer’. ”

The inflation rate is still well above the Federal Reserve’s 2% target, and the pace of inflation is still very slow.

Rick Rieder, chief investment officer at BlackRock, said: “Like a marathon runner, the Federal Reserve’s effort to bring inflation down to its 2% target level requires some patience, but it’s important. The point is, moving forward is important even at the beginning of the race. global fixed income.

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

“If the Fed didn’t have to tighten so aggressively, the economy would weaken less and the headwinds on equities would be smaller,” Bill Adams, Comerica’s chief economist, wrote in a note.

What’s next: This is just a report in the context of a crowded economic data. But if inflation continues to moderate in November, that may be enough to convince the Fed to ease up on rate hikes.

It’s been a bad year for crypto. The value of Bitcoin has dropped by almost 75% since last November and the spectacular explosion of cryptocurrency exchange FTXA startup called a unicorn was recently valued at $32 billion, just the latest bad news for investors in digital currencies.

Cryptocurrency advocates were hoping that interest rates rise and inflation rate will drive investors away from the dollar and into alternative assets like gold and Bitcoin. They have rudely awakened this year, reports my colleague Paul R. La Monica.

Unfortunately, those assets have suffered just like stocks and bonds, proving that there’s really no place to hide in a market where worries about rising interest rates and a recession reign. .

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

A thawed cryptocurrency: Bitcoin has skyrocketed throughout the Covid era thanks to near-zero interest rates, cash stimulus and a large influx of investors from large-scale institutions. It hit a record high of nearly $70,000 in November.

Then central banks started raising interest rates to combat inflation and the dollar strengthened significantly, attracting investors as a last resort. At the same time, the economy began to falter, and new investors who still saw bitcoin as a risky asset retreated en masse.

This is not the first time there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they still outperform many major stock market indexes.

Just look at bitcoin prices since the summer of 2020. They’re up over 80%…though a long way from a smooth ride. Nasdaq, by comparison, is only up about 1% from July 2020 levels.

“Bitcoin and ethereum have been up and down all the time, but they’ve still gained a lot from mid-2020. Over that longer period of time, digital assets are still outperforming tech stocks,” said Jeff Dorman, Director. investment at Arca, a company specializing in cryptocurrencies, said.

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

Mortgage rates have been rising for most of 2022, fueled by the Federal Reserve’s rate hike regime. Last week, the Fed announced to raise interest rates 75 basis points, the sixth rate hike this year and the fourth straight hike of that size.

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

Key point: With mortgage rates up four percentage points from a year ago, buyer purchasing power has plummeted. That has pushed many buyers out of the market, and those who stay may need to look at a lower price or compromise on a home’s location, size or condition to find one that’s worth it. reasonable.

Due to this drastic variation in the cost of financing a home, sales have fallen for eight months in operation, according to the National Association of Realtors. A survey from Fannie Mae found that only 16% of people think it’s a good time to buy a home, a record low.

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