Stocks Snap Four-Day Skid Despite Hot CPI, Attention Turns to the FOMC

I will leave this introduction in for this week: For readers who are new to my work, this piece, the evening update, is meant to be a look at the major forces which drove markets in the day’s trading and a look ahead to the following day (or week on Fridays). As with the other updates, I also want this piece, to evolve in whatever way is most meaningful for readers.

So please post or email comments, questions, pushback, or suggestions, and especially what you would like to see more or less of. I read all the feedback, and I promise to be responsive. If you do put a comment in though please be sure to put an @ and my name so it alerts me.

Quick Summary

• Stocks snapped a four-day skid Friday as oil pulled back, with buyers stepping in even as a hot-enough CPI all but sealed bets on a Fed hike next week.
• August CPI landed just as expected at the headline level but core was hot sending September rate hike bets to around 90% and pushing the rate sensitive 2-year yield to its highest close since July 2024. While they fell initially, longer-dated Treasuries recovered to finish little changed, a sign the market may require more than a rate hike to see those soften materially.
• Nevertheless, indices opened solidly higher, boosted by a drop in crude prices and read-through from strong earnings from hyperscaler Oracle (ORCL). Large-cap indices would hold those gains: the S&P 500 ended up 0.9% and the Nasdaq and Dow Jones Industrial Average each about 1%, but the small-cap Russell 2000 would again lag, giving back half its early advance to close 0.5% higher.
• Friday’s bounce trimmed the weekly damage but couldn’t erase it with the Nasdaq and S&P 500 ending 0.7% and 0.8% lower respectively on the week, while the Dow’s loss was deeper at 1.6%, and the Russell 2000 lagged -2.4% after a weak Wednesday-to-Friday.
• Breadth was the best in a while: 9 of 11 sectors closed green and four gained more than 1%, led by the megacap-growth sectors — Communications, Consumer Discretionary, and Tech — plus Industrials. Only Health Care and Utilities slipped, neither more than 0.35%.
• Oil was a relief valve: WTI (cash) fell 3.6% to just over $100, though still booked big weekly gains (~10%), although prices were turning back higher late in the day after Saudi Arabia shut its East-West pipeline, a key alternative to the Strait of Hormuz for its oil exports, following multiple attacks.

Second largest move for the SPX on CPI day (after June’s) since at least last December.

Market Commentary

• “We can’t ignore the fact that there are emerging-market-type risks in some of the actions the US has been taking,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management and a member of the Treasury Borrowing Advisory Committee, which advises the government on bond issuance. “We typically haven’t seen interventionist policies coming out of the US. Or when we have, it has been a formal, institutionalised process.”
• “We had the Oracle numbers as a reminder that there’s a tech story that’s still very, very vibrant,” said Guy Miller at Zurich Insurance. “That’s what investors keep coming back to. We know for at least the next two quarters that earnings are going to be really robust.”
• “Equity markets will most likely be driven by bond yields and oil prices for the coming days,” said Raphael Thuin at Tikehau Capital. “There is no panic at the moment, but one can feel some concerns rising on second-round inflation, even if we’re not there yet.”
• While long-term yields are likely to continue to rise, strong earnings will help shield US stocks from a drawdown, said Kevin Thozet at Carmignac. “Earnings growth expectations are such that they seem to be able to handle a rise in the cost of capital,” Thozet said. “We’re still quite confident and remain invested in the US stock market.”
• “This is clearly not the inflation report that markets feared, but neither is it the report that settles the US inflation question once and for all,” said Florian Ielpo at Lombard Odier Investment Managers.
• “There’s no guarantee that the Fed will hike next week, but it’s hard to see how the central bank can justify leaving rates on hold,” said Chris Zaccarelli at Northlight Asset Management.
• “For the Fed, it is time to put up or shut up,” Omair Sharif, president and founder of Inflation Insights LLC, wrote in a note to clients.
• “This number just solidifies that shifting of the center of gravity toward hiking,” said Diane Swonk, chief economist at KPMG. “Now the question is not whether they hike, it’s how much they need to hike to contain this inflation.”
• “The debate has quickly shifted from whether the Fed will hike to the more important question of how many hikes this cycle will ultimately require,” Seema Shah, chief global strategist at Principal Asset Management, said. “We do not expect the Fed to be one-and-done. This is no longer simply about fine-tuning the economy. After half a decade of above-target inflation, policymakers are likely to conclude that more than one hike will be needed to re-establish price stability.”
• “The renewed march higher in oil, gasoline and diesel prices add to concerns that higher energy prices could spill over to other goods and services and inflation expectations,” Nationwide Chief Economist Kathy Bostjancic said in a note. “As such we are now looking for the Fed to raise rates” next week, she said.
• “August’s CPI report likely won’t be able to reassure the doves on the FOMC to keep rates on hold. Together with the hawkish market reaction, the Fed likely will have to hike at its September meeting… The unfiltered market signal is clear: Investors want and expect the FOMC to hike. If the Fed does not hike, Warsh will lose credibility in the eyes of market participants.” — Anna Wong, Andrew Scher and Troy Durie, BBG
• “A Fed rate hike next week now looks like a go,” economists for Evercore ISI, led by Krishna Guha, wrote in a note to clients Friday. “We think Chair Warsh will judge that the data is not quite good enough to look through the additional pressure from oil and retain credibility shaken by his poor July press conference, and he will probably be able to carry a decent majority of voters.”
• “It’s not really a report that makes us get more concerned about the inflation outlook,” even if it will lead the Fed to raise rates next week, said Stephen Juneau, a senior economist at Bank of America Corp. An increase like the one seen in the wireless services category “tends to be noisy and reverse,” he said.
• The bigger question is what comes afterwards, according to Bret Kenwell at eToro. “If the Fed presents the move as insurance against renewed inflation rather than the beginning of a prolonged hiking cycle, markets could interpret it as a ‘dovish hike’,” he said. “That could limit further upward pressure on longer-term Treasury yields, even while short-term yields remain elevated.”
• “We believe investors will look beyond the uncertainties of higher interest rates, elevated oil prices and midterm elections to focus on continued economic growth and robust earnings through year-end and into 2027, supporting higher stock prices,” Douglas Beath at Wells Fargo said.

Stock and Sector Breakdown:

Friday brought the best sector breadth in a while with 9 of 11 finishing in the green and four up over 1% led by the megacap growth sectors of Communications, Consumer Discretionary, and Tech along with Industrials. Just Health Care and Utilities finished lower neither losing more than 0.35%.

Technology and other growth stocks supplied much of Friday’s leadership. Alphabet (GOOG) +1.53% and Apple (AAPL) +1.75% moved higher, with the Vanguard Mega Cap Growth ETF (MGK) advancing 0.9%. Semiconductor stocks bounced back with the PHLX Semiconductor Index (SOX) ending +1.8% after Oracle (ORCL) -1.82% provided a boost for some AI infrastructure stocks despite failing to hold its own early advance. Other notable winners were Dell (DELL) +11.95% and Hewlett Packard Enterprise (HPE) +12.42% which led all S&P 500 stocks Friday. However it wasn’t universal with memory makers Seagate Technologies (STX), Sandisk (SNDK), and Western Digital (WDC) down 2.98%, 3.50%, and 3.73% respectively.

On the other side lithium producer Albemarle Corporation (ALB) led decliners as workers in Chile voted on a potential strike action, although losses were very mild at just -3.76%.

Number of large SPX winners (up over 3%) improved to ~45 from 7, 12, and ~30 the prior three days, but still a very low number given the gains. The number of large losers (down over 3%) though fell to just 3 from ~40, ~45 Wednesday, and ~85.

For the week, just three sectors closed higher in Communications, Energy and Tech, but just the former was up more than 0.35% (1.85%). Five sectors closed down over 1% in Industrials, Real Estate, Health Care, Utilities, and Materials, the latter two losing over 2%.

Some stock-specific commentary from TheStreet Pro today:

Stephen Guilfoyle – Oracle Remains a Fiscal Train Wreck & Trimming 2 Disappointments, Eyeing 4 Buys

Chris Versace – Closing Out This Position as Fed Rate Hike Odds Rise

Ed Ponsi – Where (and Why) to Buy Kimberly-Clark Amid Viral Social Media Claims

A Look At The Charts

Note on all charts the colored lines are moving averages (the average price over the lookback period (days on the daily charts, weeks on the weekly charts)):
20 = green
50 = purple
100 = blue
200 = brown

Exception is monthly charts where blue is 10-month moving average and brown is 20-month moving average.

MACD = Moving average convergence/divergence line, a measure of momentum that compares longer term and shorter term momentum to gauge if a move is strengthening or weakening. This is probably my favorite individual indicator (it’s also the favorite of Katie Stockton, a very fine technician).

RSI = Relative Strength Index (basically what it sounds like) = measures the strength of the move comparing gains to losses over the given lookback window (I use the standard 14 periods).

SPX able to recover its 50-DMA, a definite positive. Daily MACD remains in “sell longs” positioning though, and RSI is right at 50. So as I said Tuesday/Wednesday “just caution flags – nothing yet to turn bearish, but that probably changes short term if the 50-DMA doesn’t hold.” As I added Thursday, “For now I’m taking some comfort in the fact it doesn’t seem CTA selling thresholds have hit, and Tier1Alpha (see below) finds the 7575 level (which we closed above) good support. If we breach that I will exit my SPX index longs until we recover the 50-DMA.” Crisis averted for now.

Weekly chart a mixed picture. So far price is holding in fine, consistent with a consolidation in a bull advance, but don’t love the weekly MACD crossing negatively. RSI remains very solid though, so another argument for holding onto longs for now.

Nasdaq Composite a similar story to the SPX with a slightly better chart. As I said Thursday “Holding here as well for now.”

Weekly chart here a little weaker than the SPX but again nothing I’m selling my positions over.

The Russell 2000 (RUT) I said Wednesday was “much more problematic,” and that remains the case despite the bounce which failed at the 100-DMA (and with a red candle to boot meaning it closed under the open). As mentioned Tuesday its MACD is now in “go short” positioning, and its RSI is now below 40. As I said Wednesday “I am not long this index, but … I’d be out until it at least recovered the 100-DMA.”

As with the daily chart, weekly chart more problematic than the others. It has a more severe decline in the weekly MACD and RSI and made the lowest weekly close since June 1st.

The equal-weighted SPX I said Tuesday “had been perhaps the strongest chart since the March bottom but is now the most concerning.” That is no longer the case as the RUT has taken that role, and I like the nice green candle meaning it closed near the highs of the session. I mentioned Tuesday “I did take off most of my holdings in (RSP) for now. I’ll be looking for a tradeable bottom to form.” I had thought the 100-DMA might offer some support, and this is a nice start, but we’ll need to see a lot more before adding.

That extends to the weekly chart where we have a weekly MACD crossover, falling RSI and the lowest weekly close in six weeks.

Treasury yields bear flattened with the short end moving higher while the long end was little changed (bearish because it implies Fed rate hikes):

The two-year Treasury yield added another four basis points to Thursday’s biggest move in over a year ending at 4.63%, the highest close since July 2024. It’s now pushed above its trend channel, signaling either it’s breaking out or it’s become extended and is in need of a pullback. We’ll likely not find out which until Wednesday.

It is ~100 basis points above the Effective Fed Funds rate (red line), screaming for rate hikes. That’s the furthest above the EFFR since November 2022 when the Fed was in the middle of a historic tightening campaign.

And again probably no surprise that FOMC rate hike expectations also shot higher. The September meeting rose to a nearly 90% chance from 70% on Thursday and 60% on Wednesday. Pricing for December now sees a 75% chance of a second hike by then and through 2027 there’s now nearly four hikes priced (90 basis points). Don’t see how the Fed doesn’t hike next week absent some sort of media tip that they are planning on not going.

From Chris Versace on the Fed – Why the Fed Isn’t Likely to Wait Until October (as I noted in last week’s Week Ahead, the idea that Warsh would wait until six days before the election to hike rates seems ludicrous).

10-year yields initially softened but retraced that move to end slightly higher at 4.97%, the highest since October 2023, and just about at 5% which as noted Thursday was a level we briefly saw before Janet Yellen took pressure off with the November refunding announcement. The SPX fell around 6% between October 17th and the end of the month during that episode.

30-year yields ended down a touch at 5.36%, just off those since 2007 levels (but as I noted Thursday really more associated with pre-2003). So it appears that perhaps the bond vigilantes want more than a single rate hike before they will pull in their horns. Yield is also right at the top of its uptrend channel.

VIX gave back the prior two session rise to 15.9. The indicator is back towards the middle of its “normal” range post-GFC, consistent with ~0.99% average daily moves in the SPX over the next 30 days.

The VVIX (VIX of the VIX) a similar story falling to 91.3, but still well above the lows of the year a week ago.

The current level is consistent with “moderate” daily moves in the VIX over the next 30 days (historically, normal is 80-100). Above 100 is the level flagged by Charlie McElligott as indicating higher stress.

And the 1-day VIX also fell back to 13.0 despite adding in the extra day to the end of the next session. The current reading isconsistent with a move of 0.82% in the SPX next session.

WTI (cash) gave back around half of Thursday’s jump but still ended up nearly 10% on the week at $100.37.

The DXY dollar index (which is fixed weighted with a heavy (57%) weighting vs the euro), got over the heavy resistance at the 200-DMA for a moment but quickly fell back to finish below.

The daily MACD remains tilted positive but the RSI is under 50. As I said Thursday “If it can get through the 200-DMA it likely runs to the 100 (blue line).”

Weekly chart tilts more negative.

Gold futures (/GC) continue to ride the downsloping 100-DMA. The daily MACD remains negative and the RSI is under 50. As mentioned Tuesday, “I will wait for it to get back over the 200-DMA to add back what I took off when it fell below.”

Weekly chart also messy.

US copper futures (/HG) managed to hold the 50-DMA and the uptrend from March (they are also in a longer term uptrend running to February 2020) but that was about it. Technicals tilt slightly bearish. Holding for now.

Weekly chart a similar story although the RSI is stronger.

US natural gas futures (/NG) as noted Thursday “now back to trading in their range since the start of July.”

Bitcoin futures were down for a fifth session early but recovered to (on a closing basis) continue to “juuust hold the bull flag formation I mentioned Tuesday. Daily technicals are turning more negative though. As I said Tuesday ‘I’ll stay long as long as it holds above the bottom of the flag (and will add if breaks above).’”

Weekly chart has better technicals, same bull flag. One notable item though is it is right under its 50-week moving average (purple line).

More From TheStreet Pro:

Chris Versace – Weekly Roundup: A Good Week to Lose Less as Market Stumbles& Will August CPI Give the Fed Breathing Room?: 8 Key Items Shaping the Stock Market Friday

James “Rev Shark” DePorre – Investors Surprise, Buy Bad Inflation and Rate Hike News

Bret Jensen – A Covered Call Strategy to Avoid Greed in a Stretched Market

Miscellaneous:

Wrap-up – The lull is close to turning into something more

As I said Wednesday:

While Ed Yardeni might say that the bond vigilantes (the term he coined) are not back, the market action today seems to indicate otherwise. Since August 25th there’s only been one day that the 10-year yield closed lower, so it seems very much that the market is testing both Treasury Secretary Bessent as well as Fed Chair Warsh. It might not even matter what the CPI prints Friday. As I mentioned in the Week Ahead, markets seem to want their “pound of flesh” and a rate hike might be the only way out unless Bessent is willing to do a lot more than he did today.

Until we see rates cool off (and oil would be a nice complement), it’s clear the non-Tech trade will struggle, and even within Tech things have gotten very bifurcated.

And as mentioned above, perhaps even a rate hike will not be enough to assuage markets. We’ll also have to see if Treasury Secretary Bessent has more tricks up his sleeve. As mentioned his predecessor found a way to stop the 10-year at 5% three years ago. Too early to count him out.

Otherwise, we’ll see where all the indicators land in the Week Ahead report.

Next Week’s Focus Will Be the FOMC

Next week brings us (finally) the September rate decision Wednesday. Endless digital ink has been spilled in the lead-up, but it appears that, like it or not, Chair Warsh is boxed in to delivering the hike the market has now almost fully priced in (he did say he wanted the markets to lead not follow). Absent what would be a very surprising decision to hold (or raise by 50 basis points), attention will quickly turn to the future path (how many more hikes). Importantly, we’ll be getting an updated Summary of Economic Projections (SEP), which will have a new dot plot that will tell us a lot based on where the dots are aligned for 2026. More on this in the Week Ahead.

In US economic data the week is full of important second-tier reports including August retail sales, industrial production, import prices, and housing starts/permits. We’ll also get the September NAHB home builder sentiment index, some regional Fed reports, and the normal weekly reports (including ADP).

Non-Bill (>1yr in maturity) US Treasury auctions are light with just a 20-year and a 10-year TIPS (both reopenings).

In terms of corporate events, just one SPX component reporting next week in Lennar (LEN).