[Chart courtesy of MarketWatch.com]

1. Moving the markets

The major indexes edged higher Monday, boosted by gains in the tech sector, as the Dow attempted to build on its rally above the key 40,000 level. That effort failed at midday, and the index closed below that milestone.

Traders are eagerly awaiting Nvidia’s quarterly results due out Wednesday to better evaluate not only the strength of the AI powered rally but also whether these sky-high prices are justified.

Of course, relentless optimism prevails with some Wall Street firms suggesting that the tech darling could gain as much as 30% from current levels. Nvidia currently has the third largest market cap in the S&P 500.

Currently, traders are still clinging to hopes for a series of interest rate cuts in 2024, a trend that has been in place for over a year. I think this view will lead to disappointment, as inflationary forces are continuing to accelerate in part due to ongoing debt and deficits, which are a result of unrestrained government spending. After all, currently our government needs to borrow $1 trillion every 100 days to pay its bills. Ouch!

When all was said and done, the markets were mixed, as the Nasdaq outperformed, the Dow closed in the red, and the S&P 500 only eked out a tiny gain. The MAG7 stocks rallied sharply but faded late in the session.   

Gold and silver rocketed higher, the dollar closed modestly in the green, but Bitcoin exploded but stopped just short of the $70k marker. Bond yields climbed moderately, as rate cut expectations drifted lower.

With Nvidia’s earnings on deck, the comparison to Cisco Systems comes into play again begging the question: Will history repeat itself?

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FED’S DILEMMA: CAUGHT BETWEEN ROCK AND HARD PLACE

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow meandered near the flat line today, after the index briefly topped the key 40,000 level for the first time in the previous session. A last hour drive by the algos pushed 2 of the 3 majors back into the green to end Thursday’s run on a positive note, with the Dow closing above 40k for the first time.

This week’s rally has helped thrust the three indexes into positive territory for the second quarter despite a sluggish start. The S&P 500 and Nasdaq are now each up more than 11% in 2024, while the Dow has climbed more than 5% on the year. Yet, gold remains the top performer with a gain of almost 17%.

Traders still insist that positive economic growth and weakening inflation will continue to be the driver for higher prices, but reality is that we have moved into a stagflation environment, with accelerating inflation and slower growth now being the dominant forces.

The US Macro Surprise index declined for the sixth straight week to its weakest since January 2023, as Zero Hedge pointed out. While that is bad news, Wall Street considers it good news, as risky stocks have risen in the face of a slowing economic environment, with the spread increasing almost daily. Go figure…

Monday’s short squeeze faded as the week went on, Bond yields slipped despite increasing rates over the past couple of days, and the dollar lost momentum. Gold surged to a new record closing high.  

Bitcoin had a big week and raced back above its $67k level, and even oil prices jumped and nibbled at the $80 resistance level. Silver dramatically outperformed gold, as it topped its $30 price for the first time in many years.

And again, as traders are hanging on to the dream of lower rates, this chart makes it very clear that inflation remains a serious threat, and if it is to be conquered, interest rates need to move higher and not lower.

I think the Fed now realizes what it means to be caught between a rock and a hard place.

[Chart courtesy of MarketWatch.com]

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.