1. Moving the markets

Stocks continued last week’s momentum to higher ground, as traders are still convinced that peak inflation is in the rear-view mirror, and that future rate hikes might be smaller because of it. That goes against Fed head Powell’s repeated assertions that he remains “strongly committed” to bring down inflation.

No matter how the CPI number will turn out tomorrow, the Fed meeting on Sept. 20-21 looms large with expectations being that they will deliver the 3^rd consecutive 0.75% rate hike. In the meantime, a softer than expected CPI reading could maintain bullish momentum and soon create a new Domestic Buy signal for our Trend Tracking approach. At this time, we are not quite there yet, as you can see in section 3 below.

As is usually the case, no major rebound can materialize without a solid short squeeze. That was the case over the past 4 trading days, as the most shorted stocks got squeezed by some 14% off their lows, as ZeroHedge posted.

Bond yields rallied with the 10-year adding 6 basis points to close at 3.36%. The US Dollar tanked again, which allowed Gold to score another winning session above its $1,700 marker, despite a late day sell off.

With the CPI on deck tomorrow, traders may again ignore the Fed’s latest warning that one month’s report will not sway them in their fight against inflation.

1. Moving the markets

All eyes were on today’s release of the Fed’s Beige Book, which showed again that bad news can be good news, as far as the markets are concerned. To sum it up, key words that assisted the bulls were “downgraded growth,” “softening demand,” and “moderating price increases.”

Manufacturing was mixed, with supply chain bottlenecks limiting activity, while labor markets remained tight. However, what really mattered was Fed Vice Chair Brainard’s affirmation that the Central Bank would do what it takes to restrain inflation. She also noted the potential risks of going too far, and that was the part of her speech that traders and algos alike focused on, and the rally was on.

Some support came from the fact that the markets were oversold, after the beating of the last 3 weeks, during which the S&P 500 got spanked at the tune of over 9%. Other comments from the Fed’s Barr (inflation is “far too high”) and Collins (inflation is “simply too high”) should have taken the starch out of today’s rally—but didn’t.

However, the comments sent the odds of a 75bps hike in September up to 90%, which also was an event that stocks simply ignored, as the goal appeared to be to end the worst losing streak in 6 years, as ZeroHedge put it.

I consider today’s rebound to be another bear market rally, which barely made a dent in the losses sustained for buy-and-holders, since Powell’s Jackson Hole comments.

Bond yields softened from yesterday’s vicious rebound, the US Dollar took a dive, and Gold bounced off its $1,700 level again.

Despite many opinions to the contrary, I believe the June bottom (yellow circle) will be still taken out:

1. Moving the markets

A feeble rebound attempt right after the opening was easily rebuffed with the major indexes swinging wildly throughout the session, but the bearish theme outlasted any bullish attempts, so we closed in the red—again. The Nasdaq posted its 7^th straight day of declines, its longest losing streak since November 2016, according to ZeroHedge.

A better-than-expected ISM reading (Purchasing Managers Index), following Friday’s jobs report, added to concerns that a more solid economy will give the Fed further reason to hike aggressively when they meet later this month.

That did not bode well for equities and sent bond yields sharply higher, with the 10-year at one point being up 16bps to 3.53% before retreating and settling at 3.34%. Rate hike expectations surged along with future rate cut expectations to validate the current hawkish tendencies.

As a result, the US Dollar reversed Friday’s course and ripped higher and, in the process, pulled Gold back down after last week’s rally attempt.  

Economist Dr. Doom, AKA Nouriel Roubini, added this warning:

I worry about a stagflationary debt crisis because you have the worst of the ’70s in terms of supply shocks, and you have the worst of the global financial crisis because of too much debt, and that combination is dangerous.

If you’re behind the curve, eventually the recession is going to be more severe, the loss of jobs and income and wages is going to be more severe.

Makes me wonder if the analog to 2008-2009 will continue to be on target?