1. Moving the markets

Year-over-year, consumer prices increased by 4.9%, down a tad from the expected 5%, while the month-over-month inflation rate of 0.4% was also in line with projections. While traders interpreted that as good news, market reaction was mixed, with the major indexes advancing only moderately.

When looking under the hood, however, we saw that there is more to this story than just a headline number, namely the fact that inflation continues to outpace Americans’ rising wages—for the 25^th straight month, according to ZeroHedge. Ouch!

Still, the softening of the CPI pulled June rate-hike odds down from 20% to less than zero. The markets spiked initially, then dumped into the red but managed to recover into the close. It was a chaotic session with no clear direction and a marginal outcome.

Helping the bulls was a double short squeeze attempt, which in the end did not do much to ignite bullish spirits. The same uncertainty emerged in the Regional Banking circus, where the index (KRE) was pumped and then dumped, which was duplicated in all bank stocks.

Bond yields took a hit, with the 2-year losing its recent gains along with its 4% level. The US Dollar rode its own roller coaster, while Gold followed the overall theme, namely cranking, then tanking but bouncing to a green close. Let’s see what the release of the PPI can do for the markets tomorrow…

1. Moving the markets

As I suspected yesterday, today’s session might not be much different, and that’s how it turned out. While inflation data, to be released tomorrow and Thursday, loom large, Treasury Secretary Yellen decided to increase the “fear meter” by announcing that failing to raise the debt ceiling would be an economic catastrophe, referring to this afternoon’s “conversation” between Biden and McCarthy.

As a result, traders and algos alike stayed away from making any key commitments, causing the major indexes to chop below their respective unchanged lines. Whether the inflation numbers are interpreted as being “sticky” or not will determine future market direction. As will acceptance of the fact that banking stresses will not just disappear, lending conditions may tighten, and increased reserve requirements will lead to fewer loans and a struggling economy.

Adding to these general uncertainties were hawkish comments from the Fed’s Williams, as ZeroHedge alluded to:

“What we’re signaling is we’re going to make sure that we achieve our goals and going to assess what’s happening in the economy and make the decision based on that data,” he said. “And if additional policy firming is appropriate, then we’ll do that.”

“I do not see in my baseline forecast any reason to cut interest rates this year,” he said, adding that the economy began the year on a solid footing, and he saw two-sided risks to the outlook. “In my forecast we need to keep restrictive stance of policy in place for quite some time.”

We have heard these kinds of words for almost a year, but the markets have not caught on and stubbornly cling to the belief that the Fed will cave and pause or pivot. Only time will tell.

The regional banking sector ETF KRE slipped, as the latest cockroach (PACW) pumped and dumped. The markets followed in similar fashion, but a worse outcome was avoided, as a short squeeze sort of saved the day.  

Bond yields climbed, with the 2-year finally conquering its 4% level again. The US Dollar continued yesterday’s rally but sold off into the close. Gold ramped higher and captured the $2,040 level.

All eyes are now on tomorrow’s CPI report. Stay tuned.

1. Moving the markets

Traders found no motivation to drive the market in either direction, as the release of key inflation data cast a broad shadow on activity. On deck first will be April’s Consumer Price Index (PPI) on Wednesday, which is followed by the Producer Price Index (PPI) on Thursday.

Volatility was the name of the game last week, with the Dow and S&P notching their worst weekly advances since March, despite a strong rebound on Friday. Continuing discussions about whether the banking crisis has finally run its course—it hasn’t—kept traders somewhat agitated.

However, some encouragement pulled the Regional Banking Index (KRE) out of the doldrums early on, but that turned into a head fake, with the index tanking late in the session. Even the most recent banking cockroach, namely PACW, followed suit by rallying some 30%, but in the end, it surrendered all its early gains.

More whispering about short-selling on banks hit a brick wall, when none other than the Fed elaborated on the effectiveness of such a move:

The 2008 ban on short sales failed to slow the decline in the price of financial stocks;

…in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted.

A tip of the hat to ZeroHedge for this “finding.”

The most shorted stocks went into an early tailspin and only managed to squeeze back to the unchanged line, meaning a zero effect on market direction.

Bond yields rose with the 2-year kissing its 4% level but closing below it. The US Dollar dumped and pumped and managed to eke out a moderate gain. Surprisingly Gold followed suit and pushed towards its $2,030 marker.

I expect more of the same tomorrow in anticipation of the mid-week inflation data.