Are Rate Hikes Behind Us? Investors Think So As Inflation Decelerates in October

Fed Chair Jerome Powell isn’t just kicking out climate protestors, he is  one step closer to the moment where he could “close the f-king door” on one of America’s headiest financial problems.

Soft landing in sight: The Consumer Price Index, America’s most popular inflation metric, grew just 3.2% YoY, bringing it closer to pre-pandemic levels — sending the S&P 500 and Nasdaq up 2% yesterday.

• What went down: Monthly energy prices decreased 4.9% in October, while airline fares fell 0.9%.
• What stayed high: Shelter contributed the most to inflation, while food prices remained stubbornly high.

The news instills confidence that the Fed could finally be done with rate hikes — as interest-rate futures estimate less than a 1% chance of another increase as of Tuesday morning, per the WSJ.

It ain’t over till the Fed sings: Last week, JPow said that the Fed was “not confident” that existing policies were enough to bring inflation to its 2% goal. And if needed, more hikes could be in the cards — a view shared by other Fed bank leaders like San Francisco’s Mary Daly.

Investors prepare for a post-inflation world

If rising rates led to a major correction in both the stock and bond market, what should investors expect when rates fall? Some are betting on the opposite — starting with the bond market. Aggressive rate hikes have driven down the prices of bonds — sending them into “the greatest [bear market] of all time,” according to BofA.

• Since the Fed began its rate hikes, US 30-year bonds have lost half their value from peak to bottom, but that has changed in recent weeks…
• Investors are piling into popular Treasury ETFs like the iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT), which has recently seen back-to-back record inflows.

Stocks too, please: Investors in BofA’s survey have begun accumulating stocks again — with cash levels falling from 5.3% to 4.7% — the lowest since Nov. 2021. Fund managers are “favouring them in their portfolios relative to benchmarks [indices] for the first time in 19 months” (FT).