Inflation Has Likely Peaked As Rates Head Lower

Today’s CPI was hotter than expected. So why did rates fall? I think it is because the market is looking at commodity prices in general and see them rolling over, or more importantly, the rate of change slowing. If the rate of change is slowing, then that is telling us that inflation rates in the future will slow. If that is the case, then it is possible that the recent rise in yields is over and that from here, rates can fall back to around 1.3%. My view has always been that inflation rates would be transitory, and at some point this would come into play driving rates lower. By all accounts given the hotter than expected inflation data since April, yields should have broken higher, but never did head to 2%. Anyway, we never got the extra 25 bps I was looking for, but going from 90 bps to 1.75%, or even 1.5%, was a pretty good call on my part. The trade has simply played out.

The jobless claim data was weaker than expected again today; perhaps that changes in July when the unemployment insurance ends for some states. But until then, the bigger risk for yields is lower.

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S&P 500 (SPX)

The stock market finally had an up day this week, with the S&P 500 finishing higher by 47 bps. The rising wedge pattern that started on May 19 continues to still be in play. Again, this normally a bearish pattern. It doesn’t mean it has to be this time, but typically, this should result in falling prices.

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Falling yields are not good for the reflation part of the stock market, which is why Banks fell sharply today. That rise in banks is likely finished as well, especially if yields keep falling. But more importantly, we continue to see the transports and housing stocks fall too. This seems to be speaking in combination with yields, that something else is going on, and the only thing that comes to mind is that there is some concern about economic growth.

Banks (XLF)

We can see that the XLF ETF broke lower, completing its rising wedge, and falling by 1.2%. Should the trend continue, which I think it shall, then it seem likely that it could move back $36.60.

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Bank of America (BAC)

Bank of America fell sharply by 1.5% today, breaking its rising wedge pattern with its next support around $40.80.

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Weyerhauser (WY)

Weyerhauser broke down also, with its next level of support at $33.50.

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It was a good day for growth stocks, and perhaps the ending of the reflation trade will push growth names higher again. Very hard to tell at this point of the game. We will see what happens tomorrow. But without the reflation aspect of the stock market in play, the S&P 500 could struggle.

Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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William K. 3 years ago Member's comment

Iflation might slow a bit as it changes to a slow but steady mode. That is to say "We ain't seen nothing yet, folks!" It will keep on creeping so that the reaction is not so noisy. The fed has already it the fire and heaped on the coal, it just takes a bit longer for the damage to result.