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Hotter CPI Rocks Markets

October 12, 2023
Frank Cabibi

Inflation numbers came in hotter than expected this morning as the CPI m/m rose by 0.4%, 0.1% higher than the expectation. The indices and gold had a negative reaction to this news initially and USD popped higher. Today, I'm going to talk about some bullish setups for indices and gold, however, and why they could rake in some more upside.

EdgeFinder Analysis

The NASDAQ has now flipped from a strong bearish bias to a bullish score of +4. The score flip was helped by today's CPI numbers that came out. Although we saw a higher than expected rate, the actual came in lower than last month's report. CPI y/y and Core remained the same.

We are also seeing a strong labor market, which the Fed has talked about as their goal while maintaining a 2% target inflation. Seeing the first bullish reading in the past month is a promising gesture towards the economic health and rising risk appetite.

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Gold fell off the hotter CPI number and after testing significant resistance on the 1D timeframe. The $1880s was a pivotal level for price to break above. If we see rejection to end the day, it may signify that price is not ready to move higher into the $1900s. Support lies around the $1865 range.

Beating expectations is not the only thing to consider when looking at inflation. If we are to zoom out to the past year, elevated rates of 8% are now slashed by more than half. The m/m rate also came in lower than last month, but because it was higher than expected, the metal sold off.

USOil is now a neutral reading due to a sudden rush of bullish retail investors, falling prices and lower GDP growth. To see this drop from such a strong bullish reading on the EdgeFinder suggests that the rally for oil is over.

Unchanged CPI y/y and Core is keeping the score at bay. The commodity does well in high inflationary environments, but that is also coupled with solid economic data. If output is falling, oil will likely not find the strength to continue higher.

Retail Spotlight

Retail is now heavily short the indices, long gold and oil, and short dollar as well. This kind of positioning seems rather counterproductive and mixed. After a small rise in the S&P, the crowd got short again. They had been long the entire way down.

Smart Money Spotlight

Last week's COT report suggested selling on the major indices while maintaining a long bias on USD. However, the positional bias towards SPX looks to be a weaker bearish reading over time. USD and USOil currently have the highest net long positioning.

Fundamental Spotlight

Here's the latest inflation data for the NAS100 in reference to the USD. US saw unchanged rates for both yoy and Core CPI. This resulted in a -1 total inflation score which is a less bearish score than last month which was a -3.

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