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Shares had a strong open yesterday but were dragged lower through the rest of the session after a profit warning from chipmaker Nvidia weighed on sentiment in the technology sector. There is also a lot of fear of Wednesday Consumer price index report for July. Consensus expects a decline to 8.7% from the peak of 9.1% on lower energy prices, while the core rate rises to 6.1% from 5.9%. Still, investors looked for bargains in energy and commodity stocks, with both sectors ending the day nearly 1% higher after correcting sharply over the past three months on recession fears.
Finviz
Tomorrow’s inflation report is yesterday’s news, but it’s important to reassure a growing number of investors that the peak is behind us. Tomorrow’s news can be found in inflation expectations and on that front we made great progress yesterday. Regardless, Wall Street pundits continue to bang their bear market drums, confident that Friday’s blowout jobs report will force the Fed to stall the stock market with a rate hike of up to 1% next month, according to strategists at Citigroup. In doing so, the professional investment community reduces risk during what Wall Street has dubbed a bear market rally.
Bloomberg
I can’t explain why the pundits won’t change their minds after the New York Fed’s July Consumer Sentiment Survey. The median one-year inflation outlook is clearly turning around, falling from 6.8% to 6.2% in just one month. The mean three-year outlook fell from 3.6% to 3.2%. Most importantly, the prospects for lower prices were broad-based, but strongest among households with incomes below $50,000, which were hardest hit by inflation. Finally, the five-year outlook dropped to 2.3% from 2.8%, which is in the crosshairs of the Fed’s target range.
New York Fed
This tells me that the Fed could hike short-term rates at either the September or November meeting with a 3% fed funds rate, an additional 75 basis points. Futures markets, which remain focused on the strong July jobs report, hold 3.5% as the highest probability for the peak. Therein lies the catalyst for the further recovery of the stock market in the second half of this year. With inflation falling faster than consensus expects, the futures market, along with inflation expectations, will reflect a less aggressive Fed tightening campaign. This should lead to lower shorter-term interest rates (2-year yield), eliminate the yield curve inversion between 2-year and 10-year yields, and be accompanied by a soft landing.
The stock market rally I’m looking for won’t be without bouts of volatility and I still think the S&P 500 will need a pullback to solidify the June low and refresh the uptrend, but we’re making real progress.
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