No One Wants to Buy Ahead of CPI
The upcoming CPI will either relieve the market pressure or confirm it.
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It was another ugly day on Thursday, and this one had the feel of some capitulation. It was gloomy from the open, with a constant drip of selling that never let up. Breadth finished at 33% positive, and there were more than 300 new 12-month lows. The Nasdaq 100 (QQQ) and the Russell 2000 (IWM) fell around 1%, and the S&P 500 (SPY) was down 0.6%.
The one thing holding the senior indices off their worst levels was some safe-haven buying in Apple (AAPL) and Alphabet (GOOGL). Take those two out and the day was worse than the index numbers show.
Report Confirmed the Oil Problem
The PPI report on Thursday morning looked benign on the surface. The headline rose 0.4% as expected and core, which strips out food and energy, came in at 0.2%, a touch below forecast. A month ago that would have been enough to attract some buyers.
That was not the case this time and the reason is in the details. The price for final demand goods jumped 1.1%, and more than three-quarters of that came from energy. Diesel prices rose 24.1% in a single month, accounting for more than a third of the entire goods increase. The annual headline accelerated to 5.4% from 4.7% in July.
That is the fallout of the Iran war showing up in the numbers. Core is contained, which is what the doves will point to, but the inflation that is actually accelerating is energy and transport costs from oil at $100 and diesel at record highs. Those costs eventually flow into the consumer numbers with a lag. This is why bonds sold off so hard on a report with innocent looking headlines.
Bonds Are the Whole Story
The bond market was pounded again and closed near the lows. In the last 11 sessions the 20+ year bond has rallied only twice. This is happening despite the Treasury tripling the size of its buyback. The government is bidding for its own paper and yields are rising anyway, which is a warning about how little demand there is for long-dated debt.
Oil closed at the highs with the conflict escalating rather than resolving. Those two things together, rising oil and rising yields, are the exact combination that has been driving this market lower for two weeks, and neither one improved today.
Game Plan
There is nothing to do in this but wait. CPI hits on Friday morning and it will either relieve the pressure or confirm it, and there is no edge in guessing which. What Thursday’s PPI suggests is that even a soft core reading may not help because energy is overshadowing everything.
Days like this are miserable to sit through but they are also what create the opportunities I have been talking about for weeks. More than 300 new lows means a great many stocks are being sold without regard to their businesses, and that is the raw material for the shopping list. I am not buying it yet, because the price action stinks and the market is showing no signs that it is finished going down. But it is getting closer to the point where the selling exhausts itself, and that is what I am watching for.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
