Mid-week market update: In the wake of the hot CPI print and the doubts raised by members of the FOMC as shown in the
minutes, such as:
Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year.
In addition…
Several participants noted that the disinflationary pressure for core goods that had resulted from the receding of supply chain bottlenecks was likely to moderate.
As a consequence, the market’s expectations of the first rate cut has been pushed out to September, with only two cuts in 2024.
The bad news just doesn’t stop
The bad news just doesn’t stop. On top of that, the market suffered the second punch of an ugly 10-year auction, with a 3.1 bp tail and dealers taking an astounding 24% of the offering, which is the most since November 2022. The 10-year yield spiked to 4.55%, which is a decisive breakout of the cup and handle pattern. The good news is there is strong resistance at the 4.9% to 5.0% zone. The bad news is resistance isn’t visible until those levels. Moreover, the last time the 10-year yield neared 5%, the S&P 500 tested its 200 dma, which stands at about 4650.
The good news is the panic may be temporary.
Jason Goepfert pointed out that big S&P 500 down days on CPI releases seem to bottom out on the second day. The bad news is tomorrow is the PPI report. If the market continues its risk-off tone tomorrow in reaction to a hot PPI, that would imply a hot PCE as the combination of the CPI and PPI data fill in most of the blanks for March PCE. As a reminder, the Fed targets headline PCE as its principal inflation indicator.
Where’s the bottom?
Unfortunately, none of my four bottom spotting have been triggered in today’s round of weakness, nor have any of the bullish tripwires that I specified on the weekend flashed buy signals (see
How serious is the market’s trend break). Initial support can be found at about 5100, with secondary support at about 5000. Should 5000 break, there is strong support at the breakout level of about 4800.
My inner investor remains bullishly positioned. My inner trader is still short the S&P 500. The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXU (note 1 for 5 reverse split today)
We may end up with a frog in the water situation. 2% target but 3 is ok, 3% target but 4 is ok…you get my drift?
As long as they keep running huge deficits, money will lose value…how could it not?
High rates make the deficit worse…what will they do?
They will change the rules
They did in 1933 and again in 1971. “Why should the treasury pay interest on our money? It’s our money!” Something like that.
When? No idea, the emperor needs time to admit he has no clothes.
Buy things that are real
This will take a long time to unravel.
The irony is that when we get trouble like a recession, rates fall, so why the big deal? I think it’s to shake us up.
Maybe the S&P goes to 4800, a year or so ago we would be deliriously happy.
As long as the currency is being debased, the market will go up. Just not in a straight line.