This is CNBC Senior Markets Commentator Mike Santoli’s daily blog with insights into market trends, stocks and statistics. There wasn’t much to like about the June CPI report: nothing to dissuade the Fed from remaining aggressive in the fight against inflation – but also not much new to shock the market or to invalidate the idea that June was the peak of consumer price momentum. The slump in oil, gasoline and other commodities over the past few weeks has likely kept the headline and core CPI accelerating month-over-month from keeping the market too scared. by the numbers. “Up off the lows” isn’t exactly a celebration or a sign that all the probably tough news is being factored in, but shows, once again, that the market is trying to build calluses against the risk stories of inflation / tightening / recession. Still very inconclusive. A fairly tepid oversold bounce in the S&P 500 is sagging just below levels first seen briefly nearly seven weeks ago (3,810 in the May 20 trading session), still a little above last week’s lows, a cool 21% below record highs. Precarious but not panicked. The market, as a first instinct, lifted the Fed’s rate hike forecast, adding a chance of a full one percentage point hike in two weeks and possibly a bigger hike in September. Still mainly on the terminal rate and the damage the economy will suffer in the meantime. The market wants to position itself for the inflection point when the Fed is about to end, with the central bank demanding several months of real numbers. Inconsistent timelines, of course, although the market has already priced in many downturns with massive underperformance in cyclical sectors over the past few months. The yield curve that the Fed considers a more reliable indicator of an anticipated recession is the 10-year minus the 3-month Treasury. It’s narrower but still a good bit above zero. As the Fed increases significantly and time passes, of course, the 3-month yield will rise out of necessity, so it’s easy to see this trigger before long. Note that this turned negative in 2006, a year and a half before a recession began, and after it turned negative stocks hit new cycle highs for over a year after. It also clicked below zero in May 2019, but let’s take credit for predicting the 2020 recession, given that it’s hard to see it happening when it did without the Covid rash. There’s still a chance that the CPI’s overshoot will make it a bit of an “offsetting event” as macro influences peak and pull back a bit (dollar above highs, yields still within their range of several months, oil correction) – just in time for companies to start getting all the attention on earnings/tips. Everyone says the consensus forecast is too high. This may be true for the next few quarters, but there’s no way this is news for the market. Much of the reversal action in calls and conference calls is a very good bet for the next two weeks of the reporting season. More and more economists are migrating from calling a “soft landing” to handicapping what most will call a “mild” recession beginning in the next few quarters. Each is plausible, all involving layers of assumptions. Suspicious as it usually is to say “it’s different this time”, it seems it won’t necessarily be a classic recession given the tight labor dynamics, housing shortages, economic cushions. consumer savings and the brevity of this expansion, which didn’t stand a chance of creating too much excess on Main Street. Additionally, the extremes of Wall Street (unprofitable cult tech, crypto) have largely been unraveled. Something can always break along the way, of course, which is why illiquid bond markets, widening credit spreads, fallout from the crypto crash, policy error (remember the excessive ECB tightening due to oil prices in 2008 and 2011?) and who knows what else is in the “watch it closely” column. The breadth of the market today is medium: 40/60, up/down after an uglier open. Very sticky VIX just above 25, now in the 27’s. Held aloft by downtrend, very choppy bond/forex markets, but suppressed by lack of demand for immediate downside protection. Not comfortable but getting used to it?
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