Pro Perspectives 1/10/23

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January 10, 2023
As we discussed yesterday, we should expect a big reaction in stocks from this Thursday’s inflation report.
The history of the past four months would suggest so (something on the order of 5%).  
And with the inflation data trending toward a soft, if not negative, monthly change in inflation, it sets ups for a bullish breakout in stocks. 

As you can see in the above chart, stocks were testing this big trend line (in yellow) and the 200-day moving average (in purple) last month, heading into the CPI report.  The number came in soft.  But the Fed meeting was a day later, and they attempted to crush any optimism about an end to the tightening cycle. Stocks went lower. 
The stock market bought the message the Fed was selling.  But the bond market didn’t.
At today’s close the 10-year yield is 150 basis points below where the Fed is projecting the Fed Funds rate at year end.  As the bond king, Bill Gross, points out, the historical average spread is just 90 basis points.  
If the bond market is right, the stock market is going higher (breaking out of this downtrend).