1. Moving the markets

The much-awaited CPI report pushed the S&P 500 and Nasdaq to record highs, as this crucial number turned out to be better than expected.

The index rose 0.3% for the month of April, which was less than the estimate for a 0.4% monthly increase. The indicator changed by +3.4% year over year, in line with expectations. Monthly and yearly numbers for the core CPI, which excludes volatile food and energy prices, were both in line as well.

The only fly in the ointment was Retail sales, which remained flat in April. Economists had expected a 0.4% leap, but then again “bad news” is “good news” when it comes to potential rate cuts. The Citi Economic Surprise Index reflects the weaking economy, as the stagflationary threat continues to worsen.  

Traders’ expectations for a softening of the Fed’s stance on rate cuts were boosted, as its likelihood of an easing at the September meeting increased to almost 58%. While that is a substantial jump from yesterday’s 45%, we’ve seen this type of relentless hope turn into disappointment before.  

Still, the continuing outlook for lower rates coupled with enthusiasm around AI has lifted traders’ sentiment all year. The S&P is currently up some 11% YTD, but gold still rules the race by being ahead with a gain of over 15%.

Bond yields slipped, with the 10-year dropping down to towards April lows. The dollar dipped, while oil rode the roller coaster but managed to close in the green. Gold surged towards its record closing high of $2,392 and reached the same level it had before April’s CPI report.

Bitcoin soared some 7% by conquering its $66k level, with the coin having its best day since March 2023. Crude oil recovered from an early drop and eked out a 1% gain.

I don’t think today’s party is justified due to today’s CPI report only playing a small part in the battle to conquer inflation. After all, as long as this country has to borrow $1 trillion every 100 days, the real inflation monster has not been unleashed yet.

1. Moving the markets

Today’s stock market narrative unfolded with a twist, as traders grappled with the implications of April’s Producer Price Index (PPI) report. The PPI, a barometer of inflation at the wholesale level, rose unexpectedly, signaling that inflationary pressures might not be subsiding as hoped.

This revelation initially sent a shiver through the markets, but the initial shock was mitigated by downward revisions to March’s wholesale prices, which suggested that inflation might still be on a downward trajectory.

Despite the mixed signals, the markets rallied, buoyed by the belief that the Federal Reserve might maintain its current policy stance. The Fed, led by Chair Jerome Powell, has indicated a need for patience, suggesting that the path to stabilizing inflation will be a marathon, not a sprint. Powell’s remarks hint at a cautious approach, with the central bank poised to let its restrictive policies gradually temper the inflationary heat.

Amidst this backdrop, meme stocks and Small Caps seized the spotlight, while the Nasdaq and the MAG 7 stocks soared to new records. The bond market, however, experienced volatility, with yields reflecting the day’s inflationary concerns and subsequent reassurances. The dollar’s fluctuations and gold’s luster provided a contrasting picture of stability and uncertainty.

Cryptocurrency and crude oil, on the other hand, relinquished their previous gains, painting a picture of the market’s fickleness. The stark contrast between the Nasdaq’s performance and the broader US Macro data raises questions about the sustainability of this divergence.

Considering these developments, one can’t help but ponder the resilience of the current financial conditions. With the Fed Fund rate at its highest in over two decades, and the market seemingly unfazed by potential risks, what could be the catalyst that aligns these divergent paths?

Could there be an unforeseen event on the horizon that will reconcile the optimistic market sentiment with the cautionary economic indicators?

1. Moving the markets

The stock market began with a surge of activity, with indices initially climbing before the momentum waned, leading to a plateau where the major indexes closed nearly flat. The Nasdaq stood out, managing to secure a modest gain amidst the general standstill.

This pattern of fluctuation reflects the market’s current state of uncertainty, particularly considering the Dow’s recent triumph, marking its most impressive weekly gain of the year with an ascent of over 2%. The S&P 500 and Nasdaq weren’t far behind, each notching up gains exceeding 1% in the same timeframe.

The financial community is also digesting the implications of a New York Federal Reserve survey, which revealed a noticeable uptick in consumer inflation expectations. The forecast for the coming year has risen to 3.3%, while the five-year projection has increased slightly to 2.8%.

These figures are critical as they precede the release of the consumer price index report this Wednesday, where economists are bracing for a 0.4% rise month-over-month and a 3.4% surge year-over-year. Similarly, the producer price index, set to be published Tuesday, is anticipated to show a 0.3% increase from the previous month.

Amidst these projections, traders are cautiously optimistic that the Federal Reserve may steer clear of rate hikes, despite a series of unexpectedly high inflation readings in recent months.

In the broader financial landscape, bond yields dipped, the dollar held steady, and Bitcoin made a remarkable recovery to $63,000, offsetting the losses from the previous Friday. Conversely, gold relinquished some of its recent gains, while crude oil prices rebounded, recouping most of the losses experienced at the week’s end.

As investors and analysts alike scrutinize these developments, one question looms large:

Will the forthcoming PPI and CPI reports alter the current stagflationary course, or will they reinforce the prevailing economic narrative?