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The CPI report came in with a year over year gain of 8.5%. That is a big inflationary number, but the market was looking for 8.7%. Not a big difference but since the prior month's report was 9.1%, it gave investors a reason to believe that inflation may be peaking. Stocks soared on the news as the Dow gained 535-points and many indices saw 2% to 3% gains on the day. This morning we'll get the PPI report so the question is whether that will be benign enough for the market to hold onto yesterday's gains. Bonds were up modestly, and the dollar fell sharply.

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The CPI report came in slightly lighter than expected but it was the direction of the move compared to last month that got the attention. The question is whether that was a turning point for inflation or if it was just an assist from the recent drop in oil and gas prices. If the price of oil, which moved back over $91 a barrel yesterday, can stay down in the $90 or below area, maybe we will be fine. But what happens if we see $100 in the coming weeks?

Who knows, but the main reason oil has come down is because of the decrease in demand based on gas prices being too high and the slowing economy, so the set up doesn't sound great no matter how you look at it, although lower prices do help the consumer.

But what this CPI report did was move the expectation for the next Fed move in rates from a 68% chance of a 75 basis point hike (0.75%) at their September meeting, to now just a 44% chance. Stocks liked that. The market tends to look forward by several months and yesterday's rally was based on July's pricing data and projecting what that might mean 3 - 6 months from now.

This is similar to the COVID crash and recovery. When stocks were tanking for a few weeks in early 2020, we had no data to tell us that the economy was going to get crushed. It was all speculation. Then the recovery in the stock market came even before the bad news was coming out in the economic reports. So the market looks ahead.

But here's what may be the difference this time. During the COVID crash the Fed opened up their wallets, dropped interest rates to 0% again and QE and government spending went through the roof. It's a different world in a zero interest rate and easy money environment. Fast forward a couple of years and that spending caused the worst inflation in decades.

And what is the Fed doing? They are raising interest rates and reducing their balance sheets. This is not the recipe for a bull market, but perhaps stocks were beaten down too hard in the last leg lower and needed more relief?

Yes, it's exciting to see stocks rally off of a good news, and who knows, it may continue for a while. But as I have been saying here for the last couple of weeks, look for a possible fake out on the upside to pull more bears into the stock market before the next show drops.




Here's the blip lower in the CPI yesterday. Notice that during the 2008 bear market the CPI also dropped like a rock.

We get the PPI report this morning which could also have an impact on the market. I assume the market will expect a similar easing of prices on the production side. What happens if that is not the case?

Trading volume was extremely in favor of the advancing issues to the tune of 91% so this was a serious rally.

The dollar dropped sharply yesterday, more than 1%, and that was after recovering quite a bit off the earlier losses. There is now resistance at the 50-day EMA, which it fell below yesterday, but there is also an open gap above that could pull it up again.




The yield on the 10-year Treasury also sold off sharply early but got back a lot of the losses before closing near 2.79%, which keeps it inverted with the 2-year Treasury by 0.46.



That drop in yields pushed bond prices higher but they closed well off their highs.


Disney, a Dow component, was up after hours yesterday after earnings, and that could give a boost to the Dow but that PPI number will be released before the opening bell and that could take the attention off of earnings.

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The S&P 500 (C-fund) took the CPI report and jumped the shark, well at least the resistance at the double top and the 200-day EMA. As I have talked about for days, if not weeks, the question is whether this breakout is for real, or a fake out to suck more people in before another leg down ensues? Technically, this looks good, but as I highlighted above and in recent days, this has happened before and it turned out to be great selling opportunities. Maybe today's PPI report will confirm the rally, or maybe it will reverse it?




The DWCPF (S-fund) is sure stretching this rally to the upside and the wedge-like formation may not be the best sign, but the bulls have been in charge and I suppose jumping in front of the momentum of this bullish train could be dangerous.




The EFA (I-fund) jumped all over that big decline in the dollar, but I am a little skeptical of emotion, rearview mirror data, headline driven rallies holding for very long. I didn't mark it but yesterday's rally opened up big gaps on both of these charts.




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Thanks for reading. I appreciate it. We'll see you back here tomorrow.

Tom Crowley



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