Just when investors grew comfortable with the Federal Reserve’s outlook, another dismal inflation report is shaking things up.
October’s Consumer Price Index (CPI) report was hot across the board, and inflation pressure is building outside of energy.
That has the market pricing in a 100% chance of a rate hike at the Fed’s last meeting of the year in December, though odds are split between whether it will be 25 basis points or 50. And more hikes could be on the way.
The developments are creating attractive trading opportunities – but not in the places investors are used to looking.
Here’s why the Fed is still staring at a big inflation problem… and how you can trade it directly.
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The CPI is a popular gauge for tracking consumer inflation. The most recent report for October continues a string of bad surprises.
The monthly change in CPI was reported at 0.4%. The core figure that strips out food and energy prices rose by 0.3%. Both measures were higher than expected.
Investors hope good inflation news could be on the horizon since oil prices have declined by 15% in less than two weeks.
But core measures are moving higher. That includes a metric that looks at core services excluding housing, called supercore.
Supercore is closely watched because it’s a good measure of inflation across services-based industries. That’s important because the U.S. economy is around 80% services.
Supercore inflation rose by 3.5% compared to last year and has accelerated in recent months. That shows building inflation pressures outside energy prices.
Other bad news includes the “breadth” of inflation – the number of categories experiencing a large increase. Across the items in the CPI basket, 58% have seen at least a 3% monthly price increase. That’s nearly the largest number of impacted categories in the past four years.
So inflation remains a big problem for the Fed. It is being cornered into raising interest rates at its final meeting of the year in December.
Knee-jerk reactions to CPI and the Fed outlook are unfolding across the capital markets. But guessing how assets like stocks, bonds, and currencies will ultimately respond is difficult.
That’s why I want to point you to another way to profit from economic developments that are coming…
Across stocks, bonds, precious metals, and currencies, variables driving the Fed can have a major impact. But other market crosscurrents are at play as well, which means it’s difficult to isolate a Fed-driven trade.
Thankfully, a better way to profit from the Fed is now here in the form of prediction markets.
You may be familiar with platforms like Kalshi and Polymarket, which have become popular for trading on sports events. But prediction markets also offer a way to wager on outcomes tied to financial markets.
That could be stock index prices, crypto movements, the daily settlement in oil prices, and even outcomes tied to economic events, including the Fed. For example, there’s a Kalshi contract for “Number of rate hikes this year?”
Prediction market contracts are structured in a way that each share pays out $1 if the event resolves in your favor. The current price of the contract reflects the odds of that event occurring.
You can trade these contracts at any time before expiration, and there have been some big moves around the Fed.
Following the latest CPI report, investors are contemplating the possibility of an outsized 0.50% rate hike at the Fed’s December meeting. A Kalshi contract linked to a 0.50% rate hike was trading at $0.01 before the CPI. It’s now at $0.11 – a 1,000% increase.
Even a contract tied to a typical 0.25% hike is priced at $0.85 as of this writing. If you think a quarter-point hike is a sure thing, that contract would return 17.6%. That’s not a bad return for a position held less than a month (assuming you’re correct).
It used to be impossible for average investors to trade directly on Fed outcomes. Instead, they had to guess how stocks, bonds, or metals would react.
But now prediction markets offer a way to trade the Fed directly. At Prediction Profits, we’ve already closed out two Fed-related contracts for a nice win. And we’ll likely have plenty more as inflation remains a major problem for the central bank.
These aren’t the only opportunities we’ll be hunting for in the prediction market space, of course. Last night, tech expert Jeff Brown and I showed how to spot incredible opportunities within the technology sector. He even shared four prediction market trades during the event.
The prediction markets are one of the most exciting spaces Jeff and I are trading right now. So if you weren’t able to tune in, be sure to catch the replay here before it goes offline.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
