Markets on disinflationary steroids. How long can this idyllic "everything rally" last?

In English, there is a phrase "everything rally", which could often be used when central banks loosened monetary policy. Then, shares, bonds and raw materials, i.e. each of the popular asset classes, usually rose in price together.

Currently, however, central banks in developed economies are sticking to tightening rather than loosening monetary conditions, and yet the "everything rally". This is probably related to the fact that investors are counting on the easing of monetary policy in the near future, because inflation will be at the target "in a moment." Are you sure?

Market reaction to the decline in inflation in the US

Yesterday's reaction to the decline CPI inflation and the base in the United States shows just that. Let us recall that the CPI dropped from 3,7% to 3,2% in October, and the core CPI dropped from 4,1% to 4,0%. This was enough for yields to fall sharply along the entire curve as the chances of the Fed cutting interest rates as early as next year increased.

The dollar exchange rate dropped the most in a year

In response to the rapid change in market interest rates, the dollar reacted and experienced the largest decline since November last year, and stock market indices soared. Nasdaq xnumx it has increased by 12% since the end of October. This means that in three weeks it made half of the movement that was expected not so long ago on a yearly basis. This is a powerful growth dynamic in a very short time, which may result from a combination of factors FOMO (fear of missing out), reduction of short positions and the so-called relief rally due to falling profitability).

Inflation in the US is still not defeated

The market is booming, the dollar has plummeted and yields have fallen. This seems to create a very favorable environment for speculators, and volatility may remain elevated and US indices may reach record levels. Nevertheless, it is important to remember that inflation has not been defeated.

The energy price component, including heating oil and gasoline, is mainly responsible for the decline in CPI. It should be noted here that October and November are months with a high base effect from last year. This means that lower inflation may persist this month. However, in December the readings will probably not be so optimistic. It's worth keeping this in mind when looking at the current madness in the markets and the still high interest rates in developed economies.

There will be no government shutdown for now

An additional factor averting uncertainty in the markets may be the postponement of the US government shutdown from 17.11.23/19.01.24/XNUMX to at least XNUMX/XNUMX/XNUMX, as indicated by the latest information from overseas.