US inflation remains elevated but falling – time to buy equities?

The most-awaited US November inflation report was just released a couple of hours ago. It showed that inflation, while elevated, is falling.

Financial markets have waited for the report to prepare for what the Federal Reserve will say and do tomorrow when the FOMC Statement is due. Also, there are no more economic releases to move financial markets until January after this week ends.

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Therefore, the November inflation report weighed on all markets, particularly the US equity market.

Details of the US November inflation report

The market expected the annual inflation to be 7.3% in November. As such, the 7.1% release is evidence that, while elevated, inflation is falling.

It gives the Fed the green light to slow the pace of its rate hikes. Also, the elevated level (i.e., still well above the Fed’s target) justifies the 50bp rate hike expected to be delivered tomorrow.

The most telling part of the US inflation report released today is that core goods are in disinflation mode while services remain sticky. For example, new vehicle prices remained flat for the month, but the prices of used cars and trucks dropped by -2.9%.

Also, energy commodities prices, such as gasoline, declined by -2.0%. So, how did the stock market react in this context of elevated inflation but falling?

Stocks loved the report, and Dow Jones surges

The equity market loved the report, as reflected by the Dow Jones gaining close to 1,000 points immediately after. With this move higher, the Dow made a new higher high, a typical development in a bullish trend.

After bottoming in October, stocks recovered most of the lost ground. For the Dow, the next critical level is a move above the previous higher high of the bearish trend that dominated the trading year.

More precisely, a move above 35,500 would put the Dow in a straight line in an attempt to the all-time high levels posted last January. Given that today’s report is bullish for stocks, one should not be surprised to see the Dow much higher in the days to come, especially if a Santa rally materializes.