Well, markets think it did, but what’s the risk?

U.S. treasury yields were off, with the 10-year down 40bp, equities mooned with the majority of sectors up two standard deviations, and the AUD strengthened on expected weakening in the USD (Fed rate cuts and expected ongoing hawkishness from the RBA).

But does a U.S. CPI print for the 12 months to October of 3.2% (energy lower/shelter higher) really signal a regime change from last month’s 3.7% print?

Maybe, and the tape will confirm that (or not) over the coming weeks as we get closer to final Fed meeting for this year, in December.

In the meantime, here are a few elements which underpin the dove/bull case:

• U.S. goods inflation is almost all gone with the sticky part stuck in services, with still rising shelter costs which partially offset lower energy prices.

• Inflation generally comes in waves because rate hikes and cuts take time to filter through the economy (i.e., lags) with wages and shelter usually the last ones to fall. But the jury’s out on whether this will happen like it did in the 1940s and 1970s and the market appears to have priced out a 1970s repeat.

• Core U.S. inflation less (what we call in Australia) volatiles, like food and energy, still rose and printed 4% - this is too high for the Fed, but it was the smallest 12 month change since September 2021, so even the Fed’s key measure is starting to roll over, but whether that is quick enough for Powell (aka Biden) is the real question.

But the more the bulls come charging out of the gates (did you see NASDAQ and treasuries last night?) there is a risk that the Fed needs to cool things down with a final rate hike in December. It’s still a risk.

Here’s the hawk/bear case:

• The Fed and other centrals need to keep higher rates in place for at least a few sold months of seeing inflation back at their targets to avoid an Arthur Burns/Paul Volcker feather and cold water scenario. If equities and bonds party too hard, they risk a wrist smacking from Powell in December.

• Janet Yellen’s Treasury needs to fund just under $2 trillion in deficit spending (and growing) and there’s another $8 trillion of Government debt and interest that need to be refinanced within the next 11 months. That will cause indigestion in Treasuries (with China and Japan no longer buying) unless higher short end yields and/or longer end coupons are offered to make treasuries more attractive. Yellen has already pointed to materially more short end borrowing (in excess of 30% of the funding mix). Moody’s downgrade will not help. Low rates will not help.

• In the meantime, the threat of Government shutdown will probably cause a spike in front-end yields like it did in May.

• Was the spike in equities more about hedge funds and others covering their shorts?

So, are we in a regime change? Maybe, maybe not.

For traders, it doesn’t matter, its Nirvana. For longer term investors, it feels more like a tread cautiously ‘cusp’ between regimes and perhaps sticking to long term secular themes so that if you’re wrong about interest rates you just need to wait longer to see the upside. But at least your face is still attached to your head and your backside is where it should be.

The regime might be changing, but it’s a battleship full of debt that’s due to be refinanced and not a ski boat and it’s going to take a bit more time to get confirmation.

Perhaps it’s time to forget doves and hawks - be an owl instead!

See you on those thermals.

Mike