Sometimes the medium-term picture is uncertain for financial markets. Right now is one of those times. Has US inflation peaked? Too early to tell. Is the US housing sector showing major signs of serious distress? The jury is out. Will the Fed signal a pause at its December meeting? Too difficult to make even a reasonable guess. So, when markets are uncertain like this, which they often can be, what is the best thing to do? One way is to trade short-term catalysts.
Identify the short-term catalysts that will move markets
When even an informed investor can’t see the way clearly you can trade very long-term views (1-3 years plus) or wait for the short-term catalyst. The way to do this is to identify what will shift the current market perspective clearly in one direction. So, let’s look at two upcoming events that will be a major focus in the current narrative – inflation and the Fed.
Inflation is key
The rise in US inflation has been driving US interest rates higher and that has been weighing on stocks. So, if we see a big drop in the December 1 US PCE inflation data what will that mean? It will mean the Fed will not need to be so aggressive and that will likely weaken the USD, and lift gold and US stocks. So, opportunity number 1 for a short-term catalyst will likely come from the US PCE print. There are also subsequent opportunities with the NFP on December 2 and US Inflation data on December 13.
The Fed is pivotal
The Fed meets on December 14 and market expectations are for a 50bps rate hike and a terminal rate of 5%. So, if the Fed hikes by only 25bps and indicates a terminal rate of 4.5% or lower then that will likely weaken the USD, and lift gold and US stocks.
These upcoming events will push the market along in line with what each of them suggests. By trading this short-term catalyst over smaller time frames traders can keep nimble during uncertain times. Remember, trading can be a very dynamic pursuit that requires different approaches at different times. In these current markets, it will likely pay to remain flexible.