At long last, the US has shown a decent drop in the monthly inflation reading and Wall Street, and especially the tech-heavy Nasdaq on Broadway, New York City, boomed. Before the close, the S&P 500, which has a lot of big name tech stocks in it, was up over 4% but the Nasdaq was 6% higher.

I know I’ve sounded like a broken record for months but the official Consumer Price Index just wouldn’t show a significant fall in inflation, despite many ‘now’ indicators showing that prices were starting to subside. As I’ve shown before, AMP’s Shane Oliver’s Pipeline Inflation Indicator was tipping inflation had to fall, with the black line in the chart below down significantly compared to the red line, which tracks the official CPI.

Last Saturday he wrote about two positives we shouldn’t ignore: “First, our Pipeline Inflation Indicator continues to slow,  suggesting that inflation pressures particularly for goods (which tends to lead services inflation) are continuing to recede. It suggests that at some point in the next few months, the US inflation rate will start to surprise on the downside, which should take pressure off the Fed through next year, hopefully in time to avoid at least a severe recession. Inflation in Australia is lagging the US by around six months so it should start to decline here early next year.

“Secondly, seasonality is also starting to become positive with shares normally rising into the Christmas/New Year period. And it’s worth reiterating that US shares have consistently rallied after US mid-term elections (which are on Tuesday), with year 3 in the 4-year presidential cycle normally being a strong year on average after year 2 (i.e. this year) which is normally a poor year.”

In case you missed it, the US mid-term elections were this week. While the results are still uncertain, they do run ahead of the third year of a US presidency and this year is historically the best for stocks.

Overnight, the October CPI rose 0.4% when economists tipped 0.6% and the annual inflation rate dropped to 7.7%, compared to September’s 8.2% reading, and it’s the lowest since January, which incidentally was when stocks started slumping, as the chart below shows.

S&P 500

US stocks at their worst this year have been down about 25% and are now down around 18% year-to-date, while we’re only off 8%. With this inflation revelation today, we could end this year in positive territory, which would be an irony, given the anguish that stocks have caused this year for a lot of my financial planning clients and followers in the media.

Our stock market is expected to open up 136 points (or close to 2%), which should be a great day at the office for stock players, unless you’ve been shorting the market!

But the good news doesn’t stop there. For those very worried about interest rate rises, this is a good step to slow down the Fed’s big 0.75% rate rises, and that could also help our RBA to start easing up soon as well. The bond market is the predictor of where rates are going and yields — effectively, interest rates — fell overnight.

This from CNBC sums it up: “Treasury yields plunged after the CPI report, with the 10-year Treasury yield falling more than 18 basis points to 3.946%, as traders bet the Federal Reserve would slow its aggressive tightening campaign that’s weighed on markets all year. The yield on the 2-year Treasury dropped more than 23 basis points to 4.395% (1 basis point equals 0.01%).”

For those going overseas for a holiday, the US dollar fell and the Oz dollar spiked. It’s now at 65.7 US cents.

This is great news for many of us who’ve struggled with falling super balances, stock portfolios and rising interest rates. Of course, this is early days. We need to see another drop in inflation in December’s reading in the US and then we need to see it here as well.

But this is the best sneak preview we’ve had, showing us what can happen to stocks when this damn inflation threat is beaten.

All we need now is Beijing to let China out of its Covid prison and Vladimir Putin to give up on his persecution of Ukraine. Then, apart from the more important humane aspect, we’ll have a real bull market on our hands in 2023 and beyond.