It was a bit of an odd reaction after the hotter-than-expected US CPI yesterday. It wasn’t so much so that we saw a major turnaround in sentiment but more so that it came as a result of broader markets taking a cue from equities instead. In a time when there is so much focus on rates, you’d figure the bond market is going to be leading the way.
At the low yesterday, the S&P 500 was down by roughly 2.4% before snapping a 6-day losing streak to finish up by 2.6%. That says a lot but it also makes sense from a technical perspective:
The low point saw a test of the 50.0 Fib retracement level of the swing higher from March 2020 to January 2022 at around 3,505. Then, came the bounce which is now pushing back above the 200-week moving average (blue line) at around 3,599 as well. Those are big, big levels that are holding for the time being.
The above chart is still one of the key ones in my view in determining equities sentiment and it certainly proved the case once again yesterday.
Now, even though it makes sense technically, there are still plenty of concerns and considerations to be wary about from a fundamental perspective. The US CPI data yesterday in itself cemented a 75 bps rate hike for the Fed in three weeks’ time. Nobody is talking about a 100 bps rate hike yet but there is also no indication whatsoever that we are near a so-called Fed pivot.
This neat chart by RBC also shows that inflation is becoming more embedded in the US economy as it is now largely driven by services instead of goods at the core:
There is the case of the lagged effect but at least for now, “simpler” solutions like resolving supply chain issues aren’t necessarily going to help too much as inflation is now more sticky in other parts of the economy.
Going back to equities, it’s a solid bounce from a key support level but unless rates threaten a more material turnaround, this might just be another short squeeze episode before it all comes falling back down again.
