That Santa Sleigh

S&P 500 recovered Friday‘s setback with ease and on rising volume amid confirmations from outside markets. Even cryptos started pulling their weight on a daily basis, which together with advance bond, dollar, PMs, and commodities price action, provided ample clues as to why my bullish bias presented in yesterday‘s extensive analysis – one not to miss – is to usher in Santa Claus rally.

Whether you look at it several hours before the decelerating CPI release, or dozen minutes before that, it was plainly obvious. Both headline and core CPI cooperated, and markets are positioning for a no-event FOMC tomorrow (I‘m deliberate, tongue-in-cheek, exaggerating). See those fireworks in real assets – no point in me talking about why I had been bullish about them all, let the account balances of those listening, speak for themselves…

A reminder of yesterday‘s key passages:

(…) Remember my early Aug call for inflation to drift to 5-6% – we aren‘t even there yet. And how about the unwritten rule to get Fed funds rate 0.5% above inflation so as to make it restrictive? Taking on the supply side drivers of inflation (crippled supply and excess demand being equally and largest inflation drivers as per Fed‘models) with demand side tools, isn‘t working as fast as the Fed wants, and the still hot labor market (3.7% unemployment rate with 5% nominal wage growth) is also proving sticky – this one though would be unrecognizable by the end of 2023 as at least full three points can be added to the unemployment rate easily. Don‘t forget the declining participation rate effects either.

So, the Fed is going to be stuck with sticky inflation and high commodity prices – even if base metals and agrifoods are likely to do better than energy over the months ahead. The Fed hasn‘t yet gotten restrictive, and markets with all their retracements of hits taken (such as Friday) are betting it wouldn‘t – the pivot hopes are still central to the bullish case at and beyond the Santa Claus time.

It‘s ultimately a conflict between how deep and widespread toll the current tightening would take – it‘s about the Moynihan and Dimon viewpoints. I would argue that the first forecast of an isolated hit somewhere where it doesn‘t hurt or spread that much, with the Fed then saving the day through easy money, is a too optimistic one. The fact that so many on Wall Street are predicting earnings to grow above inflation at the most narrow margin in 40 years (6% over 5%, equalling 1%), with this being the bullish case, tells you a lot about the challenges we are to face next year.

JPM‘s more realistic scenario assumes a tougher recession, one on the quite immediate horizon. One that wouldn‘t be easy to solve through liquidity injections. One that would bring down earnings, labor market and inflation more than anticipated. PMIs at this level never misindicated a recession, and yield curve inversion is highest since early 1980s. Hard landing if you will, with the Fed not blinking, and not cutting rates after Jun 2023, but keeping the Fed funds rate at 5.5% (higher if wage growth pressures persist – and odds are they would surprise the central bank still as we‘re in an environment of sticky inflation and rising yields, so don‘t overstay your long TLT welcome).

In such an environment, Santa Claus rally has a tough job running, running far. It needs CPI slowdown to beat expectations, and then the Fed to do 50bp only as priced in. With the statement and conference, any words would be good to grasp at – in a Hail Mary bullish fashion.

And that‘s what we got precisely, in line with my last week inflation deceleration calls – enough for the bulls to run with.

See that volume and value with tech both kicking in yesterday? The tide was rising, in the last hours before the closing bell. Typical… And off to the races in a Hail Mary bullish fashion (chart courtesy of

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