Broker Check

Why Didn’t the Hot Inflation Data Cause a Bigger Drop?

February 21, 2024

 Over the past two weeks, I stated that the “burden of proof” lays squarely with the bears, and practically that means that actual news needs to not just be disappointing but outright negative and bad because positive momentum in this market is just too strong. So while actual data and Fed speak last week were negative, it simply wasn’t negative enough to break that positive momentum and bullish mantra. And while it’ll frustrate the bears, the bulls were right, the news wasn’t bad enough to break this bullish momentum.

Yes, CPI (Consumer Price Index) and PPI (Producer Price Index) were “hot,” and that joins a growing list of economic data points (Jan. jobs number, flash PMIs, jobless claims) that implies the economy is too strong for near-term rate cuts. But the Fed will still cut in the coming months (so now June vs. May). The key distinction between last week’s CPI and PPI was this: The data showed inflation was still falling, but more slowly than expected. For inflation data to be strong enough to challenge the bullish momentum, it has to imply inflation has stopped falling and is rising again because that will challenge the idea of any rate cuts in the near term. That didn’t happen last week.

However, just because the data wasn’t bad enough to cause a market decline, it doesn’t mean it won’t have an impact. The 10-year yield is threatening to break out above 4.25%. If that occurs and it moves towards 4.35% and 4.50%, that will increase stock market volatility just like it did in August, and the biggest takeaway from last week’s data is that it’s increasing the chance of a “bumpier ride” in the market over the coming weeks— one where volatility becomes more elevated, and gains are harder to come by, but not something that would cause an outright 5-10% pullback.

However, that uptick in volatility does not mean the Oct. -to-present rally is in danger of being substantially reversed. For that to become a legitimate concern, we would need to see economic growth begin to roll over and increase hard-landing fears. A surprise slowing of economic growth remains the single largest risk to the Oct.-present rally. Last week’s retail sales were a soft number, but it will take much more negative data to increase growth worries. But make no mistake, rising fear of an economic slowdown is absolutely something that wouldn’t just break this bullish momentum; it could end the rally altogether (and require defensive positioning).

Thankfully, we’re not close to that level yet, but rest assured, we’ll continue to remain vigilant to that risk. For now, enjoy the ride.


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