[Chart courtesy of MarketWatch.com]

1. Moving the markets

The latest consumer price index (CPI) report showed that inflation in July was lower than expected on a yearly basis, but still higher than the Fed’s comfort zone. The report also indicated that real average weekly earnings did not change last month, which could be seen as a positive sign for consumers.

However, the report also revealed some signs of persistent inflation. The core CPI, which excludes food and energy, rose 4.7% year-over-year, well above the Fed’s 2% target. And the headline inflation rate was still above 3%, the same as in June.

The market reaction was mixed and volatile. Initially, traders and algorithms focused on the lower-than-expected annual inflation rate and pushed the Dow up by more than 400 points. But later, they realized that the data might not be enough to convince the Fed to delay tapering its bond purchases, and the rally fizzled out. The major indexes gave up almost all early gains by the end of the day.

ZeroHedge summed it up best:

A quiet illiquid summer day which saw oil pump-and-dump, bond yields drop-and-pop, stocks spike-and-puke, gold jump-and-slump, and the dollar purge-and-surge.

It seems that nothing much changed in the big picture, but the AI boom reversal prediction is still on track.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The markets were nervous as they awaited the CPI report for July, which will be released tomorrow, and the PPI report for the same month, which will come out on Friday.

These reports will show how much prices have changed for consumers and producers, and they may influence the Fed’s decision on interest rates. The markets hoped that inflation would slow down enough to make the Fed stop raising rates, a wish that had fueled the 2023 rally.

But the markets also feared that inflation was still lurking around the corner, and that the official numbers might not capture the true picture. The markets wobbled and wavered, but ultimately the pessimists prevailed, and the major indexes ended lower.

Other factors also weighed on the markets, such as China’s deflationary pressures, Italy’s backpedaling on bank taxes, and doubts about the AI boom. But all eyes were on the looming CPI report, which could make or break the market’s mood.

US banks suffered another day of losses, bond yields were mixed but the 10-year stayed above 4%, and the dollar was unchanged. Gold fell to its lowest level since March, while crude oil reached new highs for 2023, with WTI above $84 a barrel.

One of the most notable losers of the day was NVDA, the leading chipmaker for AI applications. NVDA dropped to its lowest point in a month, down 12% from its mid-July peak. This raised questions about whether the AI boom was losing steam, as this chart suggests.

Is history repeating itself?

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The market opened with a thud today, as investors dumped stocks amid a slew of bad news from around the world. China reported dismal trade data, showing a sharp drop in both imports and exports.

Italy slapped its banks with a surprise tax hike, sparking fears of a new debt crisis. And Moody’s downgraded the US banking sector, citing higher funding costs, regulatory capital issues and rising risks from commercial real estate loans.

Moody’s also warned of a looming recession in the US, saying that the banking sector will face tighter credit conditions and higher loan losses. So much for the Fed’s reassurance that the financial system is “resilient”. Maybe they should check their dictionaries for the meaning of that word.

The earnings season did not help either, as UPS missed its revenue target for the second quarter, sending its shares lower. The only bright spot was a late rally that trimmed some of the losses, thanks to some short covering and bargain hunting. The major indexes ended the day in the red, but not as deep as they were in the morning.

The bond market also saw some volatility, as the 10-year yield dipped below 4% at one point, before recovering slightly. The dollar gained strength against most currencies, while oil and gold prices retreated.

The AI corollary to the Covid/crypto boom is still alive, as this chart shows.

What’s next?

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow led the way in a bullish day for the stock market, while the Nasdaq trailed behind but managed to end its 4-day losing streak.

Tesla was one of the laggards, dropping 2% amid a tech sell-off. The rally was fueled by strong earnings reports, as 80% of the S&P 500 companies that have reported so far beat Wall Street’s lowered expectations.

The market rebounded despite rising bond yields and Apple’s fifth consecutive day of losses, which shaved off 10% of its value since last week. This was its worst performance since November. Tyson Foods also had a rough day, but the market recovered some of its losses in the final hour thanks to bargain hunters.

The dollar was flat, while gold dipped and then recovered but still closed in the red.

Later this week, investors will pay attention to the consumer and producer prices indexes, which are key indicators of inflation and economic health. Both could move the market significantly depending on their outcomes.

In the meantime, traders should be aware of the seasonal pattern of the volatility index (VIX), which tends to spike in August. This chart shows how this could spell trouble for stocks, as higher volatility usually means lower prices.

Remember, when the VIX goes up, stocks go down.