The S&P/ASX 200 Index (ASX: XJO) is off to a great start on Friday.
At the time of writing, the benchmark index is up 1.75% in morning trade.
With the ASX 200 rallying, you might expect that September's inflation data out of the United States, released yesterday, came in below expectations.
Lower inflation in the world's top economy, after all, would foreshadow less aggressive interest rate hikes ahead from the Federal Reserve. And if 2022 has reinforced anything, it's that equity markets don't like fast-rising interest rates.
But here's the thing.
September's inflation numbers out of the US came in hotter than consensus expectations.
What was the latest inflation print out of the US?
The series of sharp interest rate rises from the Fed in 2022 have yet to curb fast-rising prices in the US.
The core consumer price index (CPI), which takes out the more volatile food and energy costs, leapt 6.6% on an annual basis. Core CPI was up 0.6% from the previous month and now stands at its highest level in 40 years.
Putting food and energy costs back in the mix, overall CPI was up 8.2% over the year and up 0.4% from August.
Both measures of inflation exceeded consensus expectations, with the median forecasts in a Bloomberg survey of economists predicting a 0.4% monthly rise in the core CPI and a 0.2% lift in overall CPI.
With inflation continuing to run hot, analysts are now widely predicting the Fed will have no choice but to raise rates by another outsized 0.75% at its upcoming November policy meeting. With more sharp hikes likely in the months ahead.
Just the kind of expectations you might expect to send US markets and the ASX 200 lower.
Why is the ASX 200 rallying on higher US inflation data?
Indeed, US markets did open sharply lower.
Just minutes after opening, the S&P 500 Index (SP: .INX) was down a painful 2.4%.
Then something remarkable happened.
Over the course of the day, the index gained 5.1% from that low to close 2.6% higher.
As for the ASX 200, the Aussie market looks to again be taking its lead from its US counterparts.
Commenting on the extraordinary turnaround in US equity markets yesterday, many analysts are pointing to options traders, who'd gone all in on bearish (short) options before the release of the CPI report, needing to cover their positions as the market turned.
According to Matt Maley, chief market strategist at Miller Tabak & Co (quoted by Bloomberg):
There were so many people set-up for a big decline after the CPI number that when it didn't see any downside follow-through, the short-sellers panicked and started buying. There's no question that traders got caught offside in a major way…
Those people should have known that the technical setup made the market ripe for a bounce and so they should have covered their shorts at/near the opening. Bear markets do not bottom until the stock market becomes cheap. With earnings very likely to fall in the coming weeks and months, this market is not cheap at all.
Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, added:
There may be some short covering going on, but also, a lot was priced in. There has likely been a fair amount of defensive positioning lately in equities and on the rates side, higher policy rates means higher probability of a hard landing.
With the ASX 200 surging today, there may also be a fair number of short-sellers caught on the wrong side of the trend.
As for long-term investors, you're unlikely to hear any of them complaining about today's strong run.
