One Last Hooray Before CPI?

S&P 500 downswing was rejected but did it need to happen in the first place? Squaring the bets before Thursday‘s CPI doesn‘t appear to be underway – the risk-on sentiment reigns still in the credit markets, but value stocks aren‘t cooperating, for they declined against the backdrop of a litlle rising Treasury yields.

VIX probed lower values, and doesn‘t look likely to have much success breaking below them next – and the put/call ratio is still rather complacent. The S&P 500 rally is about to be challenged, but stocks will ultimately prevail – I look for the bad inflation data to spur momentary panic selling. The bets on taper would increase regardless of how distant that concept is. Stocks would waver, but get over that eventually, and tech is probably going to do fine.

The dollar doesn‘t look to be turning around – Thursday‘s upswing has been erased, but look for the greenback to reflexively rise when confronted with „taper now“ prospects. But is the Fed ready to welcome higher rates, and work towards them? I look for plenty of assurances that the support would be very gradually withdrawn so as not to affect the markets…Toothless compromises for public consumption fit into the picture greatly too…

Summing up:

(…) The guessing game on the Fed‘s taper goes on, and the upcoming CPI readings won‘t add to the markets‘ peace. Most likely, fuelling the sense of taper urgency as the inflation figures won‘t be coming on the low side. Add in the job market slowly catching fire, and you‘ll understand why I have been calling for months for elevated inflation readings.

While many of the counter agruments sound fine (low yearly base, disrupted supply chains, reopening demand rush etc), they would be forgotten over the coming months as little relevant. Commodities exerting cost-push influence, and job market pressures, would be a one-two punch to the transitory inflation arguments. Deflationary shock simply isn‘t likely at the moment – the market will more probably find out the Fed isn‘t as serious about taper as it pretends to be – the ostrich pose. Or we might be cushioned into a higher inflation environment actually (thank you, Janet), being told it‘s for our own good.

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