The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Lukewarm enthusiasm
Markets calmly treaded water in anticipation of inflation data this morning. PPI (5.5% vs 6.2% est & 6.0% prior revised from 6.5%) was cool. This was a confirmation of yesterday's CPI data. Markets reacted immediately, although without large price adjustment. Stocks popped, yields dropped, the Dollar fell, precious metals climbed, and Fed hiking expectations lessened. These were the same reactions to the cool CPI release yesterday. The initial reactions of markets lasted into the open and extended through the day, although equities did go negative briefly at lunch. Capital flow was almost usual, printing 95%.
The Treasury and rates markets appear to have taken the latest inflation data to heart. Yields have come in and the probabilities for a Fed hike at the next 2 meetings are 10% and 47% respectively, a material drop from Monday’s 43% and 60%. After a month or two of upward trending rates, this week’s inflation data seems to have confirmed a local top and set in motion a downward trend. This should be very bullish for stocks.
Stocks are reacting positively as well but the magnitude of the reaction remains puzzlingly small. Perhaps the earnings season nervousness is explanatory but it seems like a weak argument. For unclear reasons, enthusiasm for dropping inflation and dropping rates is being tepidly appreciated by US stocks. With the S&P only 50 points under its all-time high and a likely strong earnings season kicking off, the inflation data and the reaction by bonds *should* have lit quite a fire under the equity bulls.
Maybe we need to actually breakout into new highs for the momentum-chasers and the equity bulls to get active. I am not sure why they are being so patient/apathetic.
We’ll have to see if the coming earnings results inspire the bulls to take the market for a rip.
From my perspective, it seems inevitable. The puzzle is why it’s not already in motion.
See you tomorrow.
-Mike
Visdom Market Commentary
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