Hot Inflation Melts Markets
CPI gain of 8.6% (y-o-y) is too hot to handle.
The Consumer Price Index (CPI) for May was 8.6% higher than a year ago. Rising food, gasoline, energy, and housing costs contributed to the elevated reading.
Interest rates rose, and stock prices fell as traders feared more aggressive actions by the US Federal Reserve.
As we analyzed last week, the Fed will have difficulty reducing inflation because inflation is being driven by factors outside their control.
Trading will likely be driven entirely by inflation fears until the data improve (the following CPI report is on July 13).
The market was hit hard on Friday and closed down sharply for the week. With bonds closing lower as well, there were few places to hide.
The net-bull bear balance reversed sharply on Friday to close at approximately -65, effectively reversing the uptrend from the past two weeks.
The S&P-500 hourly chart gives a good look at trading this week. The market traded in a narrow range defined by the resistance and support levels defined by prior lows (see chart below). On Thursday, it broke lowers on fears of a hot CPI reading and followed through on Friday when the report was released. New lows are probably likely as the market grapples with higher interest rates.
The 2-year and 10-year treasury rates fell below recent support after the CPI report, and next week’s FOMC meeting will set the tone for the next few weeks.
The market will have to digest the inflation data and await the FOMC discussion next week.