We had a lot of big market moves on Thursday, and it all comes down to what the consumer price index (CPI) report did to United States Federal Reserve policy expectations, as December now has 85/15 odds; this was a 50/50 toss-up on Wednesday. And now the terminal rate (peak) has shifted lower to 4.85 per cent from five per cent.

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David Rosenberg: Why that 'remarkable' stock market rally was just another head fake Back to video

Who knew a 15-basis -point trimming here could elicit a 1,200-point surge in the Dow Jones industrial average and a 5.5 per cent jump in the S&P 500? This smacks of more short covering.

Indeed, the most heavily shorted stocks blazed the trail with a 10 per cent run-up, the largest spike since April 2020, but back then, monetary and fiscal policy were heading into super-stimulus mode — there was a bona fide catalyst beyond a data point. Not what anyone can construe as a normal reaction, even though it was indeed a great CPI report. But the investor response in both equities and Treasuries (and the U.S. dollar, too) was extreme.

Keep in mind that the thumbprints of deflation across the report are emblematic of a weakening domestic economy, pricing power and, therefore, corporate profits. If I had told you at any time in the past that a 0.3-per-cent reading on the core CPI could trigger the best day for equities in more than two years and a sharp 28 basis-point plunge in the 10-year T-note yield, as well as a 2.1 per cent drop in the DXY dollar index (the worst drubbing since 2015), you probably would have sent me to the psych ward.

High-yield bond spreads only tightened 10 basis points (to 475 basis points), which recouped but half the prior day’s widening. And as great as the CPI data were, 10-year TIPS breakevens fell a modest four basis points to 2.4 per cent. A step in the right direction, for sure, and a shot in the arm from my view, but the moves we saw in stocks, nominal bond yields and the DXY dollar index, as much as the latter is a very overcrowded trade, were excessive, to say the least.

Think about it this way: nearly three-quarters of a typical run-up in the S&P 500 that we see in a full year in a bull market just took place in one day. Also keep in mind that there is no Fed pause. An earlier end to the tightening cycle at most, but the reality is that the Fed still intends to hike again, no matter what, into an inverted yield curve.

The Fed is already coming out with a chill narrative in the aftermath of Thursday’s tame inflation data. “This is just one piece of information. It’s far from a victory, 7.7 per cent is very limited relief. We can’t be complacent,” San Francisco Fed’s chief executive Mary Daly said. And Philly Fed chief executive Patrick Harker said, “I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance.”

Continuing to tighten into an inverted yield curve? Talk about playing with fire

Now that’s a major “yikes.” What does “slow” mean when the Fed has been giving a steady diet of 75-basis-point hikes? A 50 beeper? Even 25? That doesn’t sound like a pause to me; or if we do get the pause, it’ll be at a much higher level than we have today. That is not my call, but that is what he wants us to believe right now. And notice the plural — “hikes,” not “hike.” Could that mean the Fed is on autopilot into early next year? What happened to data dependency?

Harker doesn’t seem to believe that policy has become restrictive enough. Geez, try selling that to anyone involved in the housing industry. Continuing to tighten into an inverted yield curve? Talk about playing with fire. This sets us up for a recession next year. Don’t just take my word for it. Famed investor Carl Icahn, on the best day the stock market has experienced in some time, stated for the record that we are still in a bear market and that, indeed, a recession has arrived. I posit that it will be severe, not mild, and a complete recovery will take time.

This is the boom-bust scenario that the Fed is primarily responsible for due to all the actions it’s taken through much of 2020 and 2021 — 2021 in particular. But nobody likes to talk about it, and, for some reason, chair Jay Powell is constantly seen in a very positive light. I should just allow history to be the judge of that, and so I will (sort of).

As for the market action on Thursday, I must repeat, absolutely remarkable. The S&P 500 closed Wednesday below the 50-day moving average (3,791) and then not only blew past it on the upside on Thursday, but pierced the 100-day moving average as well (3,902). The stage is now set for a test of the 200-day trendline of 4,082. And then this source of resistance will see the market roll over again.

This was another in the long line of bear-market rallies. The conditions for a fundamental bear-market low never occur when the Fed is still raising rates (in the here and now) into an inverted yield curve. For the 10-year T-note, the slide in yields to 3.81 per cent takes it very close now to the 50-day trendline of 3.79 per cent. A break here sets us up for the 200-day moving average of 2.92 per cent.

As for the DXY dollar index, it has gone from deeply overbought to massively oversold with the snap of a finger — now the most below the 100-day trendline since May 2021. It is 107 now, so keep an eye on the 200-day moving average at 104.8.

Back to the stock market one last time — to put a 5.5 per cent surge in the S&P 500 in context, history shows these tend to happen in bear markets, not bull markets. I count at least eight flashy bear market rallies in 2008 alone. Let’s take a page out of the history books to understand the manic behaviour that typifies classic bear market psychology. As a result, we are inclined to believe that this is yet another head fake — as we have seen many times this year.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on Rosenberg’s website.

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