1. Moving the markets

After the anticipated arrival of today’s CPI, which came in at 8.5% YoY, vs. an expected increase of 8.5%, the markets jumped with the Dow gaining some 500 points, a level we closed at.

The bullish ramp showed no weakness during the session, as traders were relieved that the Fed may now back away from its hawkish stance of maintaining the higher rate path. If we continue to see declining inflation prints, the Fed could very well begin to slow the pace of monetary tightening with a Fed pivot eventually taking place.

This assumes that inflation has peaked, which is just as incorrect as the Fed insisting all last year that inflation was transitory. I think the inflation monster has not even been unleashed so far and worse is yet to come. As one analyst so succinctly posted regarding this current CPI reading:

Remember that one month does not make a trend. But also remember that every trend starts with one month.

To me it means, that this July print could be just an outlier, but only time will tell if this is accurate. Unfortunately, real average weekly earnings continue to plunge, as ZeroHedge pointed out, now down 16 straight months, as inflation eats away any wage gains.    

As a result, rate hike odds tumbled instantly, bond yields dipped and ripped with the US Dollar diving and commodities thriving. Gold spiked but gave back some of its early gains yet managed to defend the $1,800 level successfully.

Our Trend Tracking Index (TTI, section 3) befitted as well and has now crawled within striking distance of a new Buy signal.

1. Moving the markets

An early rally of some 260 points in the Dow bit the dust, as questions about future demand in the semiconductor industry spoiled the party. Nvidia’s unexpected earnings preannouncement and guidance pulled the stock down by some 8% and cast questions on rival stocks as well.

After having had a chance of looking under the hood of last week’s strong labor report, it turns out that some of these numbers are simply not what headline news indicated, but that the true jobs gains are lower, as an increase in multiple job holders distorted the true job growth picture.

Additionally, the reality has set in that the Fed and its mouthpieces have been very clear about their intention of fighting inflation, which means, we are still in a bear market rally with the much hoped-for “low interest rate pivot,” which formed the basis of last month’s rally, nowhere in sight.

Bond yields slipped, as anxiety over Wednesday’s CPI print created even more hesitation, despite expectations being of a “less hot” reading, but nobody can be sure. However, it will give some clarification as to what the Central Bank’s next move will be, when they meet in September.

ETF Tracker StatSheet          

You can view the latest version here.

PONDERING A STRONG JOBS REPORT

1. Moving the markets

After much anticipation, today’s jobs report came in stronger than expected (528k vs. 258k), which caused an early sell-off, but the major indexes managed to claw back towards their respective unchanged lines, even though uncertainty reigned. However, with the help of the biggest weekly short squeeze since January 2021 any bearish momentum was wiped out.   

The idea that the Fed will have to pivot to lower rates, which was the driver for the recent bear market rally, has traders concerned, as today’s jobs numbers point towards the option I have mentioned before, namely that the Fed may stay in the inflation fighting game a while longer. Chief market strategist Art Hogan, explained it succinctly:

Anybody that jumped on the ‘Fed is going to pivot next year and start cutting rates’ is going to have to get off at the next station, because that’s not in the cards.

With ZeroHedge also throwing cold water on too much enthusiasm:

The crazy thing, of course, is that Wall Street now thinks that the Fed’s tightening phase will be over by December and that the battle against inflation has been won, thereby enabling a new round of rate cutting and soaring stock prices.

Dream on!

Then adding this bon mot:

With a ‘malarkey’ of Fed Speakers all singing from the same hymn sheet – no pivot, we’re battling inflation, don’t expect rate-cuts next year – this morning’s 6-standard-deviation beat in payrolls really stole the jam out of the exuberant donut the market had been hoping for as ‘good news’ was definitely ‘bad news’ from hoping for a dovish Fed to return imminently.

There you have it. The reason for the recent comeback has been annihilated, but it remains to be seen when and how soon the markets will adjust to this new reality, as rate hike expectations soared, and the odds of a 75 bps in September spiked from 25% to 80%.

As a result, bond yields ended the week higher with the 10-year closing at 2.84%. Higher rates helped the US Dollar but pulled gold back below its $1,800 level. For the week, Crude oil got hammered and closed at $88.40.  

The question now remains, as ZeroHedge explained with this chart: Will stocks either fall back to reality, or is the Fed about to embark on the greatest flip-flop in history?