There Are High Hopes for CPI, But Technical Conditions Are a Problem
We are set up for a 'sell the news' reaction but will it turn into another bear trap?
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For over a year, the market has been wrongfully anticipating a Fed interest rate cut. Jerome Powell keeps delaying cuts as the economy remains robust and the jobs market stays strong. While there has been steady slowing of inflation, the Fed was concerned that economic strength would cause a rebound in inflationary pressures.
In his recent testimony before Congress, Powell indicated that there are clear signs now that the jobs market is starting to weaken and economic growth is slowing. He hinted that a rate cut was likely coming soon, and the market now anticipates a 70% chance of a rate cut at the September 30 Fed meeting. This is a jump from odds of about 50% a month ago.
On Thursday morning, the market will get another piece of the puzzle. The CPI report for June will be issued at 8.30 a.m. ET. Core CPI is expected to rise 0.2% for the second month in a row.
The market has been running up very strongly into this critical report with the expectation that it will be soft enough to increase the odds of a rate cut in September. Market momentum has been extremely strong, and the indexes and a number of big-cap technology names are technically extended. It is a setup for a "sell the news" reaction to the economic data, but many such setups in the past year have not worked at all and turned into bear traps.
There is some early nervousness on Thursday but the issue isn’t just the CPI report. Friday morning, there will be the PPI report, Michigan consumer sentiment, and the start of earnings season with reports from a number of large banks. Due to the stretched technical conditions, any of these news events could catalyze some profit-taking.
An additional factor that will complicate the market response is that we have a tremendously lopsided market. The average stock is not extended, but a handful of big-cap technology names that drive the market are wildly extended and quite expensive. If the market does correct on economic news, will it trigger rotational action or cause index selling that pressures everything?
Some downside volatility would be healthy at this point as it would allow charts to consolidate, but the market never makes it easy for investors.
At the time of publication, Rev Shark had no positions in any securities mentioned.
