Wall Street is putting hope ahead of reality…again – CNN | CarTailz

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Shares rose on Thursday for their best day since 2020 after a key indicator of inflation came in weaker than expected. Investors donned their party hats as they interpreted the report to suggest that peak inflation may finally be behind us. That means the Federal Reserve could be less aggressive in raising interest rates.

But Wall Street’s memory is short: Less than two weeks ago, Fed Chair Jerome Powell said in no uncertain terms that interest rates would stay higher for longer. Investors could be in for another disappointment as continued price pressures in housing, wages and energy mean the central bank still has a long way to go in the fight against inflation.

What’s happening: The consumer price index rose 7.7% for the year ended October, a much slower pace than economists had expected at 8% and the lowest annual inflation figure since January.

While Fed Chair Jerome Powell said earlier this month that the central bank still has “some ways to go” in its fight against inflation, sentiment is growing that the Fed may be changing its current regime of historically high rate hikes and easing to accommodate rising ones fight prices.

From Thursday afternoon there were markets pricing in an 80% chance of a half-point rate hike at the Fed’s December meeting. That would mean a three-quarters-of-a-point slowdown after four consecutive gains.

But investors have a knack for raising their hopes of a pivotal move by the central bank, only to be dashed by another piece of negative data or an aggressive message from a Fed official.

“The near-term market reaction may be strong, but this is only one month’s worth of data,” warned Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “All this year the market has moved from one story to the next. While the October CPI data could help moderate some of the Fed’s trajectory, it would take much longer for the Fed to make an actual dovish turn in the coming months, rather than sticking with its recent ‘higher for longer’ message.”

The inflation rate is still well above the Federal Reserve’s target of 2% and the pace at which inflation is falling is still very slow.

“Like an athlete running a marathon, the Federal Reserve’s attempt to bring inflation down to its 2% target will take some patience, but most importantly, it’s important to move forward, even if it’s still early in the race,” said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income.

It’s not all bad news: In a marathon, the first kilometer counts. The latest report bodes well for the economy and could mean that a soft or soft landing, where inflation eases without a recession, is still achievable. This is also good for the markets.

“If the Fed doesn’t have to tighten as aggressively, the economy will weaken less and headwinds for equities will be less,” wrote Bill Adams, Comerica Bank’s chief economist, in a statement.

What’s next: This is just one report in a crowded landscape of economic data. But if inflation weakens further in November, that could be enough to convince the Fed to ease its rate hike.

It’s been a terrible year for cryptocurrency. Bitcoin’s value has fallen nearly 75% since last November, and the spectacular implosion of cryptocurrency exchange FTX, a so-called unicorn startup recently valued at $32 billion, is just the latest bad news for digital currency investors.

Crypto advocates hoped that rising interest rates and inflation rates would drive investors away from the dollar and towards alternative assets like gold and bitcoin. You’ve had a rude awakening this year, reports my colleague Paul R. La Monica.

Unfortunately, these assets have taken a hit just like stocks and bonds, proving that in a market where concerns about rate hikes and recessions are paramount, there really is nowhere to hide.

Gold prices have also fallen this year, although not nearly as much as digital currencies. They’re down about 6%.

A Crypto Thaw: Bitcoin rose through the Covid era on the wings of near-zero interest rates, stimulus money and a large influx of investors from major institutions. In November, it reached a record high of almost $70,000.

Then central banks started raising interest rates to fight inflation and the dollar strengthened significantly, enticing investors as the ultimate safe haven asset. At the same time, the economy was starting to turn sour and the new investors, who still viewed Bitcoin as a risky asset, were exiting in droves.

This is not the first time there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they’ve still outperformed many major stock market indexes.

Just look at bitcoin prices since summer 2020. They’re up more than 80%…although it’s been far from a smooth ride. For comparison, the Nasdaq is up only about 1% from where it was in July 2020.

“Bitcoin and Ethereum went straight up and down, but they’re still up a lot as of mid-2020. Over this longer time horizon, digital assets still outperform tech stocks,” said Jeff Dorman, chief investment officer at Arca, a crypto-focused firm.

Bad news for potential homebuyers: Mortgage rates are back above 7% after falling slightly last week.

Mortgage rates have been rising for most of 2022, spurred by the Federal Reserve’s rate-hiking regime. Last week, the Fed announced it would hike rates by another 75 basis points, its sixth rate hike this year and the fourth consecutive hike of this magnitude.

“The housing market is the most interest-rate-sensitive segment of the economy, and the impact of interest rates on homebuyers is evolving,” said Sam Khater, Freddie Mac’s chief economist. “Home sales have declined significantly and as we near the end of the year they are not expected to improve.”

The bottom line: With mortgage rates up four percentage points year-on-year, buyers’ purchasing power has fallen. This has pushed many buyers out of the market, and those that remain may have to look for a lower price or compromise on a home’s location, size, or condition in order to find one that is affordable.

Because of this drastic change in the cost of financing a home, sales have declined for eight consecutive months, according to the National Association of Realtors. A Fannie Mae poll showed that just 16% of people think this is a good time to buy a home, a record low.

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