Inflation Delivers a Pleasant Surprise

The market got exactly what it wanted this morning: inflation data that suggests the Federal Reserve might have more room to maneuver than previously thought. The Consumer Price Index came in softer than expected across the board, and when you dig into the details, it looks even better than the headline numbers suggest.

Here's what the numbers showed: Headline CPI registered 0.2% for the two-month period from September to November, below the 0.3% consensus. Year-over-year CPI now stands at 2.7%, down from the prior 3.0%. Core CPI, which strips out volatile food and energy prices, also came in at 0.2% versus the 0.3% consensus. Core CPI year-over-year dropped to 2.6% from 3.0%.

Looking beneath the surface at the various components of the CPI data reveals something important: this report is significantly better than expected. That reality is now pushing the probability of a January rate cut up to around 60%. President Trump may well use recent decisions from the Bank of England and European Central Bank as ammunition to pressure the Fed into action.

Initial jobless claims came in at 224K versus a 229K consensus, right in line with expectations and suggesting the labor market remains stable without overheating.

Micron Drops a Bombshell

If the inflation data got the market's attention, Micron Technology Inc. (MU) earnings report absolutely electrified it. The memory chipmaker delivered blowout results that are bringing aggressive buying into the AI trade in early morning trading.

The numbers are frankly stunning. Micron is guiding second-quarter earnings per share to $8.42, nearly double the $4.71 consensus estimate. That's not a modest beat; that's a company telling you the world has fundamentally changed.

And the details get better. High Bandwidth Memory, the specialized chips that AI systems desperately need, is completely sold out through calendar year 2026. Customers aren't just placing orders anymore; they're engaging in multiyear agreements to secure supply. Micron projects the total addressable market for HBM at $100 billion. The company is guiding gross margins to 68% and increasing capital expenditure guidance to $20 billion from $18 billion.

Here's why this matters: memory chips have historically gone through brutal boom-and-bust cycles. When demand is hot, prices soar and margins expand. Then capacity floods the market, prices collapse, and margins evaporate. Rinse and repeat. But this time, due to artificial intelligence's voracious appetite for memory, the upcycle is likely to be far more sustainable than past cycles. The demand profile is different, the customers are locked in for years, and the technology barriers are higher.

Full disclosure: Micron is held in portfolio positions, with a long position established from $21.77.

Technical Picture Brightens

The SPDR S&P 500 ETF Trust (SPY), which tracks the benchmark S&P 500 index, is painting an increasingly bullish technical picture. The market is currently positioned between zone 1 support and a key resistance magnet level. More importantly, the Relative Strength Index shows the market emerging from oversold territory, which typically indicates significant room to run on the upside.

The combination of better-than-expected inflation data and Micron's projections is providing the fuel for this move higher. When you get fundamental catalysts aligning with technical setups, that's when markets can really move.

Global Central Banks Make Their Moves

Across the Atlantic, central bankers are taking action. The Bank of England cut its key interest rate to 3.75% from 4%, though the decision wasn't unanimous—four of nine members wanted to hold rates steady at 4%. The BOE expects inflation to reach its 2% target in 2027.

The European Central Bank took a different approach, leaving its key rate unchanged at 2%. The ECB is also raising its growth forecast for 2026 and 2027, projecting inflation will reach its 2% target in 2028.

These divergent approaches across major central banks create an interesting dynamic. With the BOE cutting and the ECB holding but sounding optimistic, pressure builds on the Federal Reserve to demonstrate it's not falling behind the curve.

Following the Smart Money

Most portfolios today are heavily concentrated in the Magnificent Seven technology stocks, which makes monitoring daily money flows in these names increasingly important for understanding broader market direction.

In early trading, money flows turned positive in Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA). Only Apple Inc (AAPL) showed neutral money flows.

The broader market indices also showed positive flows, with both SPY and Invesco QQQ Trust Series 1 (QQQ) attracting buying interest in the early session.

Bitcoin Stays Range-Bound

While stocks celebrate, Bitcoin continues trading in a range without breaking definitively in either direction. The cryptocurrency isn't participating in today's risk-on move, at least not yet.

Portfolio Strategy Considerations

In this environment, the approach should balance participation with protection. Consider holding existing long-term positions while maintaining a protection band consisting of cash, Treasury bills, or short-term tactical trades, along with short to medium-term hedges.

Your protection band should reflect your individual risk preference. Calculate it by adding cash to hedges. The high end of the protection band suits older or more conservative investors, while the low end fits younger or more aggressive investors. If you're not using hedges, your total cash level should exceed the base recommendation but remain significantly below what you'd hold if combining cash with hedges.

A protection band of 0% would signal extreme bullishness with full investment and no cash. A protection band of 100% would indicate extreme bearishness, requiring aggressive protection through cash and hedges or outright short positions.

Remember this critical point: you cannot take advantage of new opportunities if you're not holding enough cash. When adjusting hedge levels, consider using partial stop quantities for individual stock positions while allowing wider stops on remaining quantities. High beta stocks, which move more than the market, may require even more room to work.

Rethinking the 60/40 Portfolio

For investors clinging to the traditional 60% stocks, 40% bonds allocation, the current environment requires some nuance. Probability-based risk-reward analysis adjusted for inflation doesn't favor long-duration strategic bond allocation right now.

If you want to maintain a 60/40 framework, focus exclusively on high-quality bonds with durations of five years or less. For those willing to add sophistication, consider treating bond ETFs as tactical positions rather than strategic buy-and-hold allocations at this time. The bond market is navigating too much uncertainty to justify locking in long-duration exposure as a set-it-and-forget-it position.

The interplay between cooling inflation, resilient economic data, and surging AI-driven demand for specialized semiconductors is creating a fascinating market environment. Today's moves suggest investors are increasingly confident that the soft landing scenario remains intact, with the added bonus of a sustainable technology boom that could support valuations even if multiple expansion slows. Whether that optimism proves justified will depend on upcoming data and how aggressively central banks respond to these improving inflation readings.