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Santoli: The market is indecisive in advance of the next big catalyst, Friday’s inflation report

This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. Every day a similar pattern: a threat to break down, pops and feints in a low-volume tape, but no escape yet from what has been a narrow wait-and-see range ahead of Friday’s consumer price index report. Whether the CPI data will truly be a decisive message about the path of inflation, the Federal Reserve and risk assets is quite unclear. But it’s the one big, known catalyst ahead, and traders and investors figure it makes sense to see the numbers and reaction before making sudden moves. A fair amount of energy is being gathered up as the indexes coil tighter. We’ll see which way a release goes. Ping-pong on a short table: Breaking down by more than another half-percent or so could start up the chatter that at least a retest of the May lows near 3,800 might be needed but not there yet. The heavy streak of upside breadth in the push off the May 20 lows usually gives credence to a rally and should mean that area has a shot at holding on a first test due to the real-money accumulation there, but no indicators are flawless. The market has had to absorb some severe macro moves and certain factors approaching investors’ possible pain threshold, but so far the market has been more indecisive than in retreat. German 10-year yields have shot from 0.95% to 1.45% in two weeks as the European Central Bank screeches hawkishly . U.S. yields are pushing toward the recent highs as Fed funds futures imply the central bank will get short rates toward 3% this year. Oil is skyward and above $120, and consumer-cyclical warnings keep coming from U.S. companies. With all this, is the market’s sideways path a mark of robustness and resilience or deferral and denial? The uptick in weekly jobless claims not too dramatic, but it reflects the softening of the labor market many have been looking (and even hoping) for. No real “bad news is good news” response from markets, though, because it’s still a monthslong project to wait for inflation numbers to prove (or refute) the peak inflation premise. The Fed meeting is next week, and it remains too early for the central bank to get the persuasive evidence it needs to quit erring on the side of “tough love.” Gasoline prices peaking would be a significant relief. Who can say at what level this occurs, but refiners have gone vertical in a way that suggests production margins are almost “too high.” Here’s the global refining-stock ETF CRAK over its entire history. Things can change fast in dynamic commodity businesses. UBS points out that the valuation reset has meant the average S & P 1500 stock looks cheaper now than it has over some 60% of its own history. In 2016 and the early 2010s, levels like this had positive forward implications for stocks. In 2000 and early 2008, it was more a measure of how overvalued stocks had recently been and how quickly earnings support was giving way in recessions. No clear signal, but a fair case can be made that valuation itself is no longer a serious headwind for longer-term returns. Market breadth is soft again and the equal-weight S & P has given back a bit of its prior outperformance versus the standard S & P this month. Partly just means the mega-caps have stabilized, with the huge Nasdaq 100-type names showing some of the stability and defensive character in a growth slowdown that they became known for in 2020. This does not mean they will lead the market higher. There’s lots of sloshing around the corrective zone. VIX is a bit above its recent floor of 24. CPI and Fed keeping it from retreating the low end of the year-to-date range near 20.

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