[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early trounce was followed by quick bounce, but upward momentum could not be sustained, and the impact of the inflation report proved to be stronger than some of the positive early earnings results. The three major indexes all closed on the red, albeit by a small percentage.

For sure, the inflation numbers turned out to be hotter-than-expected with the CPI increasing by 5.4% in June from a year ago, which was its fastest increase in 13 years, according to the Labor Department.

The Core CPI, excluding food and energy, leaped 4.5%, its sharpest move since 1991, exceeding its estimate of 3.8%. Adding insult to injury were used car prices, which rocketed higher by an amazing 45% YoY.

Of course, as I expected, word on the street spread that all of this will prove to be temporary. Yeah right!

These numbers overshadowed blowout earnings by big banks and PepsiCo and may keep the markets on a leash for the time being, with bond yields getting hit hard as the 10-year spiked to 1.417%.

The US Dollar Index surged, dropped, and surged again, as volatility rose and Gold whipsawed. The precious metal ended the session with a slight gain and remained above its $1,800 level.

It was a wild day and created a tug-of-war via opinions that favored inflation to be “transitory” vs. those that see it as a “permanent” companion. My bet is on the latter.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite a downside opening, the major indexes regained their upward momentum rather quickly and once climbed above their respective unchanged lines, continued their path to score another winning session.

Support came from positive expectations of the upcoming earnings season, which will start later this week. For sure, some analysts are counting on blockbuster earnings results, but even more important will be the outlook discussion as to what the future might bring.

However, keep in mind, when comparing Q2 earnings of last year with this year, there better be a huge improvement given the pandemic slowdown during 2020. We might see a record growth rate, but it’s a distorted measure due to comparing a now growing economy to one that was in shutdown mode.

We will also have to face important economic data such as key readings on inflation mid-week followed by June retail sales on Friday.

The results were mixed today with value (+0.54%) sprinting ahead of Small Caps (-0.28%), while the Financials (XLF) outperformed the broad indexes with a gain of +0.98%.

As far as the S&P is concerned, some analysts are seeing warnings signs, as breadth severely lags, meaning that only a minority number of stocks are carrying the load to drive the index higher.

Bond yields and the US Dollar went predominantly sideways with not much gained. Gold slipped slightly but managed to hang on to its $1,800 level.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The markets dumped right after the opening as concerns about the economic recovery losing steam went mainstream. No surprise here, as I had mentioned that issue in recent posts and more evidence surfaced this morning.  

Losses accelerated as Japan declared a state of emergency in Tokyo for the upcoming Olympics, and other countries had to deal with a rebound in cases due to Covid variants.

On the economic side, the latest Jobless Data were a downer with the numbers coming in at 373k, higher than expected, and thereby adding to the issue of a slowdown in the labor picture. On the other hand, as I posted yesterday, Job Openings are at a record high, so those without one simply need to get up and apply.

Added one investment advisor:

The market has been in one of those ‘Goldilocks’ stretches when economic growth was accelerating while inflation and interest rates remained low. Increased Covid cases, particularly Delta Variants have caused concerns that the economic acceleration will slow. A few weeks ago, the porridge was too hot, now it seems it is too cold. With markets at all-time highs and some valuations stretched there is little room for economic slowdown in this market.

As a result of a potential slowdown, bond yields continued to slip with the 10-year dropping below the 1.30% level, thereby catching a lot of shorts by surprise. Many pros had bet on rising bond yields and not falling ones. Covering those short positions by buying them back created a vicious cycle by pushing yields even lower.

The US Dollar attempted an early breakout but succumbed to selling and closed lower. Today ended up being opposite day as sinking yields and a slipping dollar combined to give gold a boost mid-day, which unfortunately faded, but the precious metal managed to at least successfully defend its $1,800 marker by closing up a scant +0.06%.

We’ve seen abnormal rides in the markets recently, with the major indexes hanging around all-time high territory. The much hoped for “V” shape economic recovery may have pulled us out of the Covid doldrums from last year, but only thanks to the reckless money creation efforts by the Fed. However, right now it appears that those efforts have hit a brick wall.

After all, artificial stimulation can only do so much before organic growth must take over to create a true recovery. Currently, it’s questionable in my mind whether we are on the right path.