UK Inflation Hits 41-Year High, U.S. Elections Add More Clarity | Daily Market Analysis

Key events:

• USA – Core Retail Sales (MoM) (Oct)
• USA – Retail Sales (MoM) (Oct)
• Canada – Core CPI (MoM) (Oct)
• UK – BoE Gov Bailey Speaks     
• UK – Inflation Report Hearings     
• Eurozone – ECB President Lagarde Speaks     
• USA – Crude Oil Inventories

U.S. stock prices continued to rally yesterday as an unexpected weakening in producer prices bolstered optimism that the Federal Reserve (Fed) will ease monetary policy tightening and the New York Empire State Manufacturing index was better than expected, indicating that the U.S. economy is holding up well.

The news that a Russian missile fell in Poland partially dampened optimism about lower inflation and sustained growth. However, escalation of tensions has been avoided so far, with U.S. President Joe Biden saying that the missile was "unlikely" to have come from Russia.

At the index level, geopolitical concerns proved short-lived, and the S&P500 eventually rebounded and ended the session 0.87% higher, just below the psychological 4000 mark, while the Nasdaq jumped 1.45% and played the 100-DMA for the first time since mid-September.

On an individual level, TSM was one of the session's biggest leaders. The company's stock jumped more than 10% on news that Warren Buffett's Berkshire Hathaway had acquired a stake in the company worth about $5 billion. Investors concluded that Buffett thinks the sell-off may have bottomed out after a nearly 60 percent drop since the beginning of the year that wiped out $250 billion.

In addition, the U.S. midterm elections cleared up considerably yesterday. Republicans are now just one seat away from controlling the House of Representatives, while Democrats have a majority in the Senate, and the Dec. 6 runoff election will show how tight the majority will be.

What does that mean? It means that Republicans are likely to block impressive Democrat spending packages, and Biden's proposed taxes for oil and gas companies will never come out.

In addition, the price of U.S. oil rose on geopolitical fears after the strike in Poland and on a decline of more than 5 million barrels in U.S. oil inventories last week. More official EIA data is due today, and a decline of 2 million barrels in inventories is expected.

In the currency market, the U.S. dollar weakened after a combination of a soft producer price index and a good manufacturing activity index from the Empire State restored dovish expectations for the Fed.

EUR/USD briefly traded above the 200-DMA, near 1.0420, amid a general decline in the U.S. dollar. A better-than-expected improvement in the ZEW economic sentiment index in Germany gave an additional boost to the euro.

In the UK, the pound reached 1.20 for the first time since the summer of this year. UK inflation data showed that it reached 11.1% compared to the 10.7% forecasted by analysts. This, combined with wage growth at its fastest pace in over a year, revived the Bank of England's (BoE) hawkish expectations, although the BoE insists that rate hikes will not be as aggressive as the Fed's because of non-ideal macroeconomic conditions.

Rishi Sunak will announce the British budget this Thursday, and the Brits may have to work hard to fill the gap in the budget. According to a Bloomberg study, Britain needs 185 billion pounds to fund its budget.

But since the Liz Truss tax cuts turned out to be a big failure, Rishi Sunak will feel relatively comfortable announcing tax hikes, including a tax on excess profits of energy companies.

Today we will be watching U.S. retail sales, inflation in Canada, the Bank of England monetary policy report hearing, Andrew Bailey's speech in Parliament, and Christine Lagarde's speech.