Stocks jump after CPI: MGK rallies amid much lower interest rates (NYSEARCA: MGK)

Khanchit Khirisutchalual

These were bullish misfires across the board from the October CPI report released this morning. The headline rate of 7.7% year-on-year was lower than the +7.9% expected by economists. The month-over-month figure was just 0.4% against a consensus estimate of +0.6%.

At the base level, the CPI was only +6.3% from a year ago, while the monthly figure was 0.3% higher. Average hourly wages are still deep in the red after inflation at -2.8% as workers, especially those at the top end of the income scale, see their wages fail to keep pace with the rise in consumer prices.

CPI cooler than expected

CPI cooler than expected

Christian Fromhertz

There are now clear signs that the headline CPI peaked with a print of 9.1% in June. That’s what the Fed wants to see, but we still need some weaker inflation numbers to give Chairman Powell and the rest of the FOMC a reason to pivot.

CPI by category

CPI by category

Liz Ann Sonders

4 consecutive declines in the headline CPI

4 consecutive declines in the headline CPI

Trade economy

Housing prices, a lagging measure, rose by the highest level since 1990

Housing prices, a lagging metric, rose by the highest amount since 1990

Liz Ann Sonders

Stocks rose sharply immediately after the data was recorded and interest rates fell. The US Dollar, meanwhile, also fell sharply as a risky trade ensued.

With the big move up in stocks this morning, stocks have now rebounded strongly in three of the last four reactions to the CPI report. Perhaps the fear of inflation turns into hope and optimism. The S&P 500 rose around 3.4% while the 10-year rate fell to 3.92%. The euro hit near a new two-month high above $1.01 after 9 a.m. EST. Bitcoin caught a bid, jumping above $17,000.

S&P 500 rebounds past CPI for third time in past 4

S&P 500 rebounds past CPI for third time in past 4

Mike Zaccardi

10-year yield plunges after CPI

10-year yield plunges after CPI

Holger Zschaepitz

The Fed’s key rate should now peak below 5%. This is a significant drop from the peak of almost 5.2% last week. Moreover, the possibility of a 75 basis point hike in December is almost irrelevant, as traders are pricing in an 80% chance of a half-point hike, ending a streak of four hikes. consecutive majors. The Wall Street Journal’s Fed Whisperer Nick Timiraos tweeted that a 50 basis point hike is now likely in less than five weeks.

Fed funds futures drop sharply after CPI, terminal rate below 5%

Fed funds futures drop sharply after CPI, terminal rate below 5%

CME Group

Fed funds futures curve before and after CPI

Fed funds futures curve before and after CPI

Bloomberg

Dollar Dump

Dollar Dump

invest.com

The positive reaction – a sharp rise in S&P 500 futures and a decline in Treasury yields – should help a rebound in US mega-cap growth stocks which have suffered badly from the surge in Treasury yields in 2022 .

The Vanguard Mega Cap Growth ETF (NYSEARCA:MGK) tracks the performance of the CRSP US Mega Cap Growth Index, using a passive management and full replication approach, according to Vanguard. The fund is a very efficient way to gain liquid, low-cost exposure to the upper-right large-cap growth tier of the Morningstar-style box at just 0.07% of annual expenses. The median 30-day bid-ask spread is just two basis points, while the average daily volume is just 408,000, per Vanguard. You won’t get much return from MGK as it pays out 0.65%, so placing this fund in a taxable account might be a smart move.

According to the valuation, MGK trades at a high P/E ratio of 25.6 but has a high return on equity of 33.1%. MGK is 27% invested in consumer discretionary and 50% in the information technology sector. Apple (AAPL) represents 16% of the ETF while Microsoft (MSFT) represents 13%.

MGK: expensive but high growth, exposed to rate movements

MGK: expensive but high growth, exposed to rate movements

Avant-garde

Pre-market, MGK was listed up 4% to nearly $177. I see support in the $162-$166 range – note that the pre-COVID high of $162 has not been breached, and there is a decent amount of equity demand there, as measured by the volume-by-price indicator on the left. Still, the bulls have their work cut out for them. The 200-day long-term moving average is falling and is near a downtrend resistance line near $200. I’d like to see this zone break higher with a rising RSI before we can consider signs of a bottom setting in.

MGK: stock holding support, upside resistance

MGK: stock holding support, upside resistance

StockCharts.com

The essential

After a much better than expected CPI report on Thursday morning, stocks rose sharply. Mega cap growth should benefit from the sharp drop in Treasury rates, as the niche is highly rating sensitive. MGK is a hold at the moment – ​​a break below $162 would be bearish while a rise above $200 would help cement a decent bottom.

Leslie M. Gill