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The Consumer Price Index (CPI) for November met “expectations”. As a result, the latest confirmation that inflation is stabilizing and stopping short of the Federal Reserve’s target did not seem to bother the stock market. It is still possible for the market to look past the aggregate inflation dynamic by focusing on components like declining shelter inflation. The S&P 500 (SPY) gapped open and closed with a 0.8% gain. Once again, the bond market was a more sober and wary observer of the inflation data. Long-term yields increased with iShares 20+ Year Treasury Bond (TLT) declining 1.0%.

The stock market woke up the next day after the Producer Price Index (PPI) came in hot and suggested once again that underlying price pressures in the economy continue to increase. The S&P 500 gapped down and lost 0.5%. More importantly, TLT lost another 1.2% and confirmed a breakdown below its 50-day moving average (DMA). The core PPI, Final Demand Less Foods and Energy, has trended upwards all year and is now at its highest level since February, 2023 at 3.5%.

Source: U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Final Demand: Final Demand Less Foods and Energy [PPIFES], retrieved from FRED, Federal Reserve Bank of St. Louis, December 12, 2024.

Assuming the Federal Reserve cuts rates next week as expected, I am guessing rate cuts will slow to a crawl if not come to an outright halt for the beginning of 2025. Accordingly, the Fed’s communications to the market will get about as tricky as ever. Fortunately for the bulls the market’s momentum carries a large amount of buffer from current Animal Spirits.

iShares 20+ Year Treasury Bond (TLT)
 

The fascinating contrast between stubbornly stable inflation and Fed rate cuts continues to keep me fading rallies in TLT. TLT’s earlier breakout above its 50DMA (the red line below) almost fooled me. TLT is now closing the gap up created by Trump’s pick to head the U.S. Treasury department, Scott Bessent. Assuming that gap closes, a true test of the bottom of the presumed trading range should finally unfold.

Gold
 

While TLT delivered, gold disappointed. I have a live short-term trade in PHYS and call spreads and call options in SPDR Gold Trust (GLD) that orbits my core long-term position in GLD shares. I was encouraged by GLD’s reaction to the CPI and just assumed the rally would continue into at least the end of this week. Instead, GLD reversed right back to 50DMA support. I do not have a ready hypothesis to explain this seemingly contrarian move. (I would love to hear yours!)

What Happens If the Fed Gets “Hawkish”
 

The Fed is currently dovish. It would not take much for the Fed to sound hawkish. A firm follow-up to the round of Fedspeak attempting to walk back market expectations for rates cuts could set off the alarm bells for the market. At that point, the short-term GLD trade gets less attractive. TLT will probably still be good for fades. The stock market will likely stall for at least the rest of the Santa rally season….just enough time to find the next reason to reinflate Animal Spirits.

The big wildcard for me in a “more hawkish Fed” scenario is the U.S. dollar. There are multiple countervailing catalysts that make the U.S. dollar attractive and unattractive. Thus, it is hard to develop conviction beyond the short-term technicals. Right now, I still like fading the euro against the U.S. dollar. At the same time, I finally gave up trying to catch a pullback in USD/CAD, a strengthening in the Canadian dollar (Invesco CurrencyShares Canadian Dollar Trust (FXC)). I am now playing the major breakout to the long side. USD/CAD is practically making a beeline to test a critical long-term double-top spanning 2016 and 2020.

Be careful out there!

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