Inflation moderates, China Covid rules ease. Have two heads of the dragon been slayed?

Published Tue, Dec 13 20224:41 PM ESTUpdated Tue, Dec 13 20224:47 PM EST

The stock market initially soared Tuesday after a softer-than-expected report on November consumer prices gave investors hope that the worst of the decades-high inflation might be behind us. While that may still be the case, equities later gave up most of their gains ahead of the Federal Reserve's highly-anticipated interest rate decision Wednesday afternoon. We're now hoping the S & P 500 's most recent closing low — 3,577 on Oct. 12 — holds as the bear market bottom. While still down 16% from its Jan. 3 record close, the index has bounced around 11% from those mid-October levels. Where the market goes from here depends largely on the Fed. The Fed's fight against inflation this year has been 1 head of the 3-headed dragon keeping markets from making a meaningful move higher. The other two are China's strict approach to Covid-19 and Russia's war in Ukraine. Back in June , we said that a resolution on two, or even one, of these factors might be enough to turn the tides on Wall Street. Here we are about six months later, and it's starting to look like two of them — inflation and China — may be swinging in favor of the bulls. Fed & inflation While Tuesday's consumer price index (CPI) was still very high from a historical perspective, the annual rate is tracking in the right direction and indicates that the Fed is winning its war on inflation. That doesn't mean the central bank is about to pivot, but it does mean that they can start to take their foot slowly off the economic brakes. Following the CPI report, the market odds increased further for a 50-basis-point rate hike at Wednesday's conclusion of the Fed's two-day December meeting . However, more importantly, the odds of an even smaller 25-basis-point hike at the Fed's February meeting have jumped from 35% to 57%, according to CME FedWatch Tool. The current range on the central bank's policy rate is 3.75% to 4%, following 4 straight hikes of 75 basis points each in June, July, September and November of this year. The Fed's tightening cycle began with a 25-basis-point hike in March — its first hike in more than three years — to a range of 0.25% to 0.5%, followed by a 50-basis-point increase in May. While we aren't out of the woods yet on inflation, we are at the point where we can see the other side. Tuesday's CPI reading is certainly a win for the bulls to latch on to as a reason