On Wednesday , The S&P 500 notched a 44th record close this year and the Nasdaq 100 ended above 20,000. Dow Jones was up by 1%, touching an ATH, but there was a relatively lesser enthusiasm for small-cap stocks; Russell 2000 was up by 0.26%. On the other side of the pond, European markets were optimistic, the Stoxx 600 was up and the FTSE 100 was clawing back some of the losses it had made over the China situation the day before. In China, CSI 300 bounced almost 3% in the Asia session and continued to climb after opening as investors are expected to receive a government information on possible fiscal stimulus to be unveiled on Saturday in order to boost market confidence.

China’s government, after years of trying to curb some of the country’s largest technology companies, must surely understand that only a large injection of stimulus will reawaken investors. Incidentally, Alibaba’s stock, which was trading at $300 per share in October last year, is now trading slightly above $100. It will take some time to bring back confidence in Chinese market and before any concrete step is taken, it is the appetite of investors that is expected.

However, overall market trend shows a positive trend. Copper, iron ore & US crude oil got better bids today. US crude fell below a major 50 DMA & a major Fibonacci support but bounced immediately as geopolitical tensions continue & in spite of last wk’s 5.8 mb build in US oil stocks. In turn, investors continue to hope that China’s ability to provide a fiscal stimulus could help support the bottom of oil prices until the weekend.

In other parts of the world, European indexes are higher, but futures here in the U.S. are languishing. In the minutes of Federal Reserve’s most recent meeting, some discord was apparent in the recent move of a 50-basis-point cut, though some members preferred a moderate 25-basis-point cut. Such a debate could imply that the Fed may delay further cuts in rate in November to assess prior decision. At the moment non-adjusted probability of no rate cut is at 15% although this may go up if the rest of the US data surprises market expectation with a stronger economy.

All Eyes on US CPI

Despite the fact that the Fed has changed its priorities to the labour market, inflation still plays an important role. Some of the Fed members have echoed that economic risks are “aboutneutral” in a way that any inflation rate increase would transform expectations of future rate cuts. Nominal GDP Average inflation rates forecasted: US 2.5% in August lowered to 2.3% in September but core inflation predicted is more than 3% and wages recorded a 4% growth in September. This implies that even though the Fed is gradually moving towards its desired inflation rate of 2%, the final nail on the coffin might mean a deceleration of the labour market, according to Philips curve theory suggests.

If the upcoming CPI is on par or below Market consensus, the possibility of at least one more rate cut in November will remain in the equation. But weak inflation is unlikely to support the expectation of a 50 bps cut as recent jobs data has been very robust not to mention other positive signs. Atlanta Fed’s GDP Now is expected to deliver a Q3 growth above 3% which means that such a cut believed is not possible.

On the other hand, if the inflation data surpass market expectations, it can lead to assumption that the Fed may have declared victory over inflation prematurely as well as create pressure for a pause of the FOMC meeting results in November to rethink recent policy measures.

Market Reactions to Inflation

Contrary to job data which may be positive in some cases, and sometimes negative, higher than expected inflation is usually adverse for most market players. If inflation data prove to be stronger than expected, US yields and dollar might continue their rally, while the key benchmarks of the major US indices are unlikely to achieve new record highs. On the other hand, softer inflation might threaten the emerging bullish run of the dollar but give the U.S. stock market the drive it needs to touch new peaks.