1. Moving the markets

Yesterday’s hotter-than-expected CPI report could not keep the markets under water for any length of time. The same meme was at play today, after a stronger-than-expected retail sales report pushed equities into an early hole.

In an almost repeat performance, the major indexes battled back, reclaimed their unchanged lines and closed moderately in the green, with the Nasdaq scoring a 3-day win streak.

January retail sales rose 3%, which was a lot higher that analysts’ expectations of 1.9%. Traders interpreted that as an economy that is holding up well, despite the Fed’s aggressive rate hike policies.

This latest data point again confirms that the Fed is nowhere near pausing or pivoting its hawkish stance, and their mantra “higher for longer” appears to be the continued path for the remainder of 2023.

Hawkish Fed rate expectations are rising and so are stocks, which seems paradoxical. In other words, the tug-of-war between the Fed’s intention and the markets calling it a bluff continues in full swing. Right now, the markets are winning and, as is often the case, a well-timed short-squeeze gave the bulls a much-needed assist.   

Even rising bond yields were not able to stop bullish sentiment, but they were able to propel the US Dollar higher, which hurt Gold, and the precious metal surrendered 0.9%.

ZeroHedge summed it up succinctly in that stocks simply don’t care about opposing data points due to their long-term outlook:

Higher rates sooner ->>> recession sooner ->>> crash sooner ->>> emergency rate cuts sooner (goal accomplished).

1. Moving the markets

Wild chaotic swings during the early marked the uncertainty connected with the hotter-than-expected January CPI report. Stocks dumped, pumped, and dumped again before managing to recover steep early losses. The reversal pushed only the Nasdaq back above its respective unchanged line by a moderate margin.

The CPI rose 0.5% for the month, which translates to annual growth of 6.4%. Those number were higher than the expected 0.4% and 6.2% forecasts. Casting a further shadow on the report was December’s revision to show a small gain rather than a decline.

Even though the report was better than dreaded, it also caused anxiety due to the Fed likely not being willing to take its foot off the rate hike accelerator, as it now appears that inflation may not have peaked yet, which had been hoped for by the always optimistic Wall Street crowd.

The Fed pivot narrative seems to have died a sudden death, at least for the moment, as rate cut expectations soared, thereby aligning with the Fed’s terminal expectations rate, which now has climbed to 5.3%, as ZeroHedge reported.

Traders did not have to wait long for the usual parade of Fed speakers (Barkin, Logan, Harker, Williams) to appear, to spew the words that Wall Street dislikes with a passion and has fought for months.  

Some of the abbreviated highlights contained phrases I have quoted over the past year, things like “leaving Fed rates higher for longer,” “more hikes may be needed than previously seen,” “we are not done yet,” and “our work is not done yet.”

Several efforts to incite a short squeeze worked out in the end and propelled the indexes out of a deep hole.

Bond yields soared, but the US Dollar only managed to roundtrip, with nothing gained, while Gold swung wildly and only edged out a tiny gain.

Retails sales are on the main menu tomorrow. A blowout positive number would be bad for equities, because it would confirm the Fed’s hawkishness to be the right cause of action for the time being.

1. Moving the markets

As we witnessed last month, traders maintained the same theme, namely front running the CPI report, on hopes that a weaker number will appear, which would persuade the Fed to take the foot of the hiking pedal, and that a more dovish stance towards interest rates would be appropriate.

The major indexes tried to regain their footing after the S&P and Nasdaq suffered their worst weekly declines in the past 2 months, so some bottom fishing contributed to today’s bullish sentiment.

All eyes are on tomorrow’s CPI report, which will shed some light on whether price increases have continued or slowed down because of the Fed’s hiking policy. As today’s action showed, traders are betting that inflation is cooling and that the Fed will finally relent and pause or pivot. I don’t think they are even close to that.

Any CPI surprise to the upside will pull the rug out from under the bulls and bring bearish forces back into play. Also, the earnings season will wind down later this week, and it has shown that, according to Credit Suisse, this was the worst earnings season in more than two decades when not counting recessionary periods.

Bond yields were mixed, but terminal rate expectations continued to rise, and financial conditions have started to tighten recently, as ZeroHedge noted. The US Dollar pumped and dumped, but it was not enough to keep Gold in the green, so the precious metal slipped.

Since everything gets charted these days, the consensus CPI forecast of 6.2% may very well be too conservative, if this forecast is spot on. Should recent history repeat itself, we should see a pullback tomorrow.