Episode #3

Hedging Alpha 🥷🏼

Story of the week:

Could Sticky Inflation Cause the Fed to Rethink Rate Cuts? 💭

The October Consumer Price Index (CPI) report, released on Wednesday at 8:30 AM EST, was a pivotal moment for market watchers and policymakers. Signs of persistent inflation could cause the Federal Reserve to reconsider its plans to cut interest rates.

Key Predictions and Challenges

Headline CPI was expected to rise to 2.6% y/y from 2.4% y/y in September.

Core CPI, which excludes volatile food and energy prices, was expected to rise 0.3% month-over-month, maintaining an annual growth rate of 3.3% for the third consecutive month.

This trend underscores the Fed's struggle to tackle the "last mile" of inflation reduction, a notoriously difficult phase in bringing inflation down to its 2% target.

Potential Implications for Fed Policy

Stronger-than-expected price growth in the CPI report could force the Fed to reassess its rate-cutting path, including a possible adjustment in December. Market expectations for a rate cut next month remain uncertain, with the odds currently near 50%.

Political and Fiscal Dynamics

The report follows Donald Trump's recent election victory, which introduces new fiscal policies that could complicate inflation management. His pro-growth agenda, which may include tariffs and tighter immigration policies, could boost demand while limiting labor supply, putting upward pressure on prices.

These dynamics could lead the Fed to adopt a cautious stance, especially as bond markets adjust to higher yields driven by inflation concerns.

Investing Strategies Amid Inflation

As inflation persists, investors are encouraged to focus on sectors that historically perform well during inflationary periods.Examples include

Tech: Nvidia (NASDAQ), AppLovin (NASDAQ)

Energy: Cheniere Energy (NYSE)

Healthcare: United Therapeutics (NASDAQ), Hims & Hers Health

Financials: Interactive Brokers (NASDAQ), Cincinnati Financial (NASDAQ)

Diversification across these sectors can help mitigate inflation-related risks while positioning for potential changes in interest rates.

Outlook and Conclusion

The Fed's actions will hinge on October's CPI results, which signal that inflation remains stubbornly high. Because inflation persists, the Fed may delay rate cuts until early 2025. Investors should remain vigilant and adjust their strategies accordingly.

What else happened this week:

Klarna files for US IPO

Metro Bank fined over money laundering risks

Fed Chair Powell: No "signals that we need to be in a hurry to lower rates"

Citi under investigation by US federal agencies over Russian oligarch ties – Barron’s

Hedge funds upped bets on final coal stocks ahead of post-election rally

Chevron, Super Micro among October’s most shorted stocks, says Hazeltree

What Trump 2.0 might mean for aerospace and defense stocks, according to Citi

Markets

Most important figures of the week:

Monday .com, Bayer, Shopify and Spotify Earnings:

While both Monday .com and Bayer delivered underwhelming earnings this week, Shopify and Spotify, on the other hand, delivered exceptional results: German stock Bayer and US-based Monday .com were the clearest losers of the week. Both missed Revenue and EPS expectations, the stocks lost 17,5% and 18% each. On the other hand Shopify and Spotify were absolutely winning this week. Spotify gained 11% and Shopify 25% on Wednesday.

CPI Data:

On Wednesday CPI and Core CPI data were reported. Y/Y Inflation has risen from 2.4% to 2.6%. M/M Core CPI stayed at 0.3%. The data suggests that Inflation remains sticky, which could lead to the Fed delaying the well expected rate cuts in December into 2025.