A Soft Consumer Price Index Can Still Cut Both Ways
A weak CPI report will likely increase the chances of a bigger interest rate move, but could also exacerbate economic worries.
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After sizable gains on Tuesday, the S&P 500 and Nasdaq 100 QQQ have completely recovered the losses that were triggered by a poor July jobs report, the blow-up of the yen carry trade, and the Warren Buffett sale of Apple AAPL. It is the best four-day bounce for the Nasdaq since November of 2022.
The market has done a remarkable job of digesting the sudden flurry of poor news. After very soft economic reports from July, fear surged and many cried for the Fed to rush to cut interest rates by at least a half-percentage point. The unwinding of the Japanese yen carry trade caused additional chaos for bonds, and Buffett’s sale of Apple raised worries about the valuation of big-cap technology.
All of those issues seem to have been quickly forgotten as the market celebrated a weaker-than-expected producer price index report on Tuesday that raised expectations of Fed interest rate cuts.
Now What?
The July CPI report will be released today at 8:30 a.m. ET. It is expected that it will rise 0.3%, and the core rate will jump 0.2%. A soft reading will make the certainty of a Fed rate cut even more so, but the big issue now is economic growth. Slowing CPI is inflation-friendly, but it is also an indication that growth is slowing.
The CPI report hits as the indexes confront some significant technical overhead. The S&P 500 is just under its 50-day simple moving average, and the Nasdaq 100 -- and its corresponding exchange-traded fund QQQ -- has filled a gap in the chart created by the July jobs news. The indexes have momentum, thanks to the size of the recent bounce, but is it enough to overcome the technical hurdles?
What is key right now is how sentiment has shifted. The worries about economic slowing that caused the recent corrective action seem to have been forgotten, and the focus has shifted to the positive impact of Fed rate cuts. The thinking is that maybe the economy is slowing, but the Fed will add an economic tailwind when it frees up more cheap capital.
The response to the CPI on Wednesday morning will be very important, and we will see how traders deal with the overhead resistance.
This has turned into another "V"-shaped bounce, which drives the bears crazy and creates a high level of fear of missing out. The conventional wisdom is that markets do not go straight back up after a correction like we saw a little over a week ago, but that is what they are doing. If the bears are going to make a stand, this is the juncture at which they will do so.
We have mild action in front of the CPI news.
At the time of publication, DePorre had no position in any security mentioned.
