The stock and bond markets didn't get through the CPI unscathed, but it could have been worse as we did see the indices close off their lows. The charts are showing some cracks with those losses so this morning's PPI becomes that much more important. Perhaps it will reverse the decline but the hot CPI does poses a problem for the market. The big three indices lost near 1% on the day and small caps, which are more interest rate sensitive, took a near 2% haircut. Bonds fell sharply as yields moved up.
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We came into this year with stocks rallying off the October lows after inflation showed signs of easing, and the market started to price in 6 or more interest rate cuts in 2024. That number fell to 3 as the year wore on and the inflation data was falling more slowing. After yesterday, the market may be lucky to get 1 or 2 interest rate cuts from the Fed, and if the economy is firm enough to avoid a recession, and inflation is hot, why should we get any? That's the problem for stocks right now.
The probability of an interest rate cut in June fell from 56% on Tuesday to 19.5% after the CPI report came out. Can today's PPI report, which is wholesale pricing, help that situation or will it add to the problem?
The 10-year Treasury Yield took off on the hot data. On the bright side at least the chart formations are working as we have been talking about the possibility of yields moving higher for several weeks now. We didn't know why they would go higher with all the talk of rate cuts, but here they are after the inverted head and shoulders broke out earlier in April. Just like last Thursday's negative outside reversal day on the S&P 500 was trying to tell us something was amiss.
The dollar also made new highs for the year, and that's problematic for prices in general, but this one year chart of the 10-year yield below shows us that the market can put up with rising yields for so long before it gets cranky.
The S&P 500 was holding up while the 10-year yield was rising from May through July of last year, but when they started to make higher highs above 4% in August, stocks started to tumbled for a few months. Then, in late October when the Fed indicated that cuts could be coming, yields started to fall again through the end of the year and stocks zoomed higher.
The market then put up with rising yields again since the start of the year as 6+ rate cuts became 3 cuts, and now we're talking just 1, 2, or maybe no cuts this year and the market may start getting cranky again as the 10-year moves above 4.5%.
The PCE Prices report, the Fed's favorite indicator of inflation, doesn't come out until April 26, just before big tech earnings start getting released, so today's PPI report may need to be tame enough to keep the bears from getting overly aggressive over the next two weeks.
The S&P 500 (C-fund) was down almost 1% yesterday and it took a last hour rally to push it back above last week's closing low - the dreaded negative outside reversal day. The 15-day EMA broke again and that one is now rolling over, but it closed above the 30-day EMA again and that's the hope for the bulls if the PPI can help the yield situation. Otherwise, we may have a new downtrend forming. The PMO indicator has been giving us a negative divergence for so long with no negative impact that it had become the indicator that cried wolf.
DWCPF (S-fund) broke its recent strong support around the 30-day EMA, fell all the way to the 50-day EMA where it found support and rebounded yesterday. The 2000 area could turn out to be the neckline of an inverted head and shoulders pattern. We'll keep an eye on that.
The EFA (I-fund) also broke support and looked to its 50-day average for support, filling in an old open gap from March in the process. The dollar may be hitting some resistance in the short term but the chart suggests it could be going higher, which would be bad news for the I-fund.
BND (Bonds / F-fund) was down sharply yesterday, and I believe I used the term "toast" while referring to this chart earlier in the week.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"]
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[TD="width: 284, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
We came into this year with stocks rallying off the October lows after inflation showed signs of easing, and the market started to price in 6 or more interest rate cuts in 2024. That number fell to 3 as the year wore on and the inflation data was falling more slowing. After yesterday, the market may be lucky to get 1 or 2 interest rate cuts from the Fed, and if the economy is firm enough to avoid a recession, and inflation is hot, why should we get any? That's the problem for stocks right now.
The probability of an interest rate cut in June fell from 56% on Tuesday to 19.5% after the CPI report came out. Can today's PPI report, which is wholesale pricing, help that situation or will it add to the problem?
The 10-year Treasury Yield took off on the hot data. On the bright side at least the chart formations are working as we have been talking about the possibility of yields moving higher for several weeks now. We didn't know why they would go higher with all the talk of rate cuts, but here they are after the inverted head and shoulders broke out earlier in April. Just like last Thursday's negative outside reversal day on the S&P 500 was trying to tell us something was amiss.
The dollar also made new highs for the year, and that's problematic for prices in general, but this one year chart of the 10-year yield below shows us that the market can put up with rising yields for so long before it gets cranky.
The S&P 500 was holding up while the 10-year yield was rising from May through July of last year, but when they started to make higher highs above 4% in August, stocks started to tumbled for a few months. Then, in late October when the Fed indicated that cuts could be coming, yields started to fall again through the end of the year and stocks zoomed higher.
The market then put up with rising yields again since the start of the year as 6+ rate cuts became 3 cuts, and now we're talking just 1, 2, or maybe no cuts this year and the market may start getting cranky again as the 10-year moves above 4.5%.
The PCE Prices report, the Fed's favorite indicator of inflation, doesn't come out until April 26, just before big tech earnings start getting released, so today's PPI report may need to be tame enough to keep the bears from getting overly aggressive over the next two weeks.
The S&P 500 (C-fund) was down almost 1% yesterday and it took a last hour rally to push it back above last week's closing low - the dreaded negative outside reversal day. The 15-day EMA broke again and that one is now rolling over, but it closed above the 30-day EMA again and that's the hope for the bulls if the PPI can help the yield situation. Otherwise, we may have a new downtrend forming. The PMO indicator has been giving us a negative divergence for so long with no negative impact that it had become the indicator that cried wolf.
DWCPF (S-fund) broke its recent strong support around the 30-day EMA, fell all the way to the 50-day EMA where it found support and rebounded yesterday. The 2000 area could turn out to be the neckline of an inverted head and shoulders pattern. We'll keep an eye on that.
The EFA (I-fund) also broke support and looked to its 50-day average for support, filling in an old open gap from March in the process. The dollar may be hitting some resistance in the short term but the chart suggests it could be going higher, which would be bad news for the I-fund.
BND (Bonds / F-fund) was down sharply yesterday, and I believe I used the term "toast" while referring to this chart earlier in the week.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
