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  • Weekly Summary: Markets Are Celebrating Slowdown of Inflation

Weekly Summary: Markets Are Celebrating Slowdown of Inflation

Investors are full of optimism as they are celebrating a victory over inflation in the United States. The S&P 500 broad market index jumped by 5.7% during a single day of November 10, hitting two-month highs.

October inflation in the U.S. finally slowed down as the Consumer Price Index (CPI) dropped to 7.7% year-on-year from 8.2% in the previous month, and Core CPI fell to 6.3% from 6.6% in September. Such a reaction to a slowdown of inflation is logical, but surging stock indexes cannot be considered as being justified. The Federal Reserve (Fed) continues to pump out liquidity from the markets while economic growth is slowing down. In this regard, lower inflation is not a matter to be celebrated. The flip side of  liquidity contraction amid rapidly growing borrowing costs, the Fed’s shrinking balance sheet and a lower monetary supply that has contracted by 1.5% since the beginning of 2022, would lead to a market downturn. This decline could be even steeper than it was  in spring when the S&P 500 index lost 20%.

Stronger Republicans may contribute heavily to the recession as it now seems that they may take control of the House of the Representatives as a result of the recent elections. That may lead to political chaos as some of the urgent economic bills may get stuck in congress and may become a means for conflict between the two major political parties. U.S.-China negotiation next week on the outskirts of the G-20 summit on the island of Bali in Indonesia will be of paramount importance. But the results of this negotiation may not be revealed soon. So, markets may fall into complacency before the next Fed meeting on December 14.

The S&P 500 index is now trading in the upside formation with targets at 4100-4200 points that are scheduled for mid-December. However, there is nothing aggressive in this rise, so it could be limited by the current resistance level at 3970-3990 points, as the index may roll back to 3900 points. So, a long-term downside target for the index at 2100-2200 points is intact.

The oil market is getting more interesting as Brent crude prices may change the formation to the upside next week. If prices manage to hold above $96 per barrel next week, a chance for continuous growth may emerge with targets at $105-125 per barrel by mid-December.

Gold prices are on the recovery path as they reached $1765 per troy ounce. However, that still doesn’t change the downside trend. Only if prices rise above $1800 per ounce could this trend be reversed.

The money market continues to experience elevated volatility. So, it is better to place orders considering longer perspectives and there are two signals that could be considered. Short trades on USDJPY from 148.000-148.500 reached its target at 143.250, so the trade is closed. Short trade for AUDUSD that was opened at 0.63700-0.64200 is still on the go and may be terminated when the pair reaches the 0.59000 area.