Market Withstands Hot CPI But PPI Could Be a Different Story

A surprisingly hot CPI did not do as much damage to the market as feared. 

After a gap-down open the indices battled back and closed the day with minor losses. The Russell 2000 IWM small cap was the laggard, with a loss of about 0.9%. Small caps also weighed on breadth, which approached two-to-one negative.

The winner of the day was the Magnificent Seven MAGS and the Nasdaq 100 QQQ, which had small gains. Mega-cap technology tends to be insulated to some extent from inflationary pressures, so they don’t carry much debt. Smaller stocks are much more dependent on outside capital, which is why they tend to underperform when inflation is an issue.

The market has been very sensitive lately to talk about tariffs increasing inflationary pressures, but it shrugged today when some hard data showed upside pressure on prices. The best explanation for the muted response is that there is still a high level of optimism about strong economic growth, which will offset the problem. It is Goldilocks thinking that inflation isn’t too hot because growth isn’t too cold.

Despite the mild reaction to inflation on Wednesday, that doesn’t mean that the market won’t turn around on Thursday on the PPI report and will sell off again. The inflation issue isn’t going to go away, especially after the upticks that we are seeing.

Another worry is that interest rates are running up again. Mortgages are back over 7%, and the likelihood of a dovish Fed is diminishing.

There were some nice intraday recoveries on Wednesday, but this continues to be a very hard market to trade because it is so choppy and inconsistent.

Earnings are hitting after the close, and both Reddit RDDT and The Trade Desk TTD are being hit hard.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.