Pro Perspectives 12/9/22

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December 9, 2022
The big inflation report comes next Tuesday morning.
How big of a deal is it?
The past three reports triggered moves in stocks, of a magnitude that has historically (over 25 years of history) only been associated with major events.  
In each of these past three inflation reports, the S&P 500 has traded in a range of greater than 5%.
So, this November report should be a doozy, especially since the Fed will decide on rates the day after (Wednesday).
Here's what the chart on stocks looks like as we head into next week.   

This big trendline (in yellow) still holds, defining the decline from the record highs.  And stocks trade back below the 200-day moving average (in purple) this week.  Both of these big technical levels will likely be tested again next week.
As you can see in the chart, the white boxes highlight the market behavior surrounding the prior three inflation reports.  And it was an inflation report that marked the low of the bear market.
We've talked about the reasons to believe the Fed has actually induced declining prices (deflation), rather than just a deceleration in the rise of prices (i.e. cooling inflation).
With this in mind, let's revisit this chart of "six-month change" in money supply… 
Money supply is declining, and at the fastest rate on records going back over 60 years of history.  Moreover, as you can see in the chart, a negative six-month change in money supply is highly unusual. It’s only happened twice prior to this recent episode (’92 and ’93).

Deflation is typically associated with a contraction in the supply of money and credit (the former is happening, the latter not yet).