Last Week’s Inflection Point

Are markets back on track?

Let’s have a look at the graph of the three most important indices when it comes to the United States(We will analyze just last week’s data). I’m referring to:

Dow Jones Industrial Average

S&P500

NASDAQ100

If you want to play with these charts yourself, you will find them on Google.

I guess everybody has already noticed the inflection point. After a somehow strong upside move on Monday, markets ranged near the week’s lows, before pushing higher and ending the week strong and near all time highs.

The inflection point was somewhere at the beginning of Wednesday’s trading session. Right there, during that particular trading session, markets reversed.

Why the sudden change of heart?

Just a quick glance at the macroeconomic calendar might be enough to answer this question. On Wednesday last week, we had the CPI report which basically is a measure of inflation.

CPI numbers

The data was not the best, but it was in line with economist’s expectations.

Here are our team’s main points after a quick look at the CPI report

• The consumer price index increased 0.4% from August,
• Core inflation rose 0.2% from the prior month
• Compared with a year ago, the CPI rose 5.4%
• A main reason that should get the Fed worried is that inflationary pressures can be found in categories that have nothing to do with reopening
• Higher home prices are now starting to filter through in the data. Rent of primary residence jumped 0.5%

We will not get into further details about the CPI report, but numbers are still elevated and it proves to be more persistent than initially thought.

Why is this report a good thing for the markets?

This is the question on every investor’s lips.

We got a bad number on NFP and inflation is still elevated. The Fed should start tapering to fight inflation, but their employment goal seems to stagnate, although some members said several times that their objectives were achieved.

Now, this high inflation reading is not a good thing at all.

Okay, maybe the good part about it is that it shows that companies can pass higher prices to the consumer and their balance sheets won’t suffer.

Another part of the bullish market’s reaction was based on expectation.

Market participants braced themselves for worst inflation and were pessimistic, especially after the low NFP number, which was a complete miss. Despite all of this, CPI was in line with economist projection and triggered the buy-the-dip mentality.

Also, there are voices that say the Fed will delay its taper, but there is no certainty about this sentence at all.

Bond Market

Although we got a nice push last week, we should remain careful in these dangerous markets.

The bond market already suggests some pain for the coming week. Yields were down for the first 4 days of the week, before a big push on Friday.

If the yield continues to advance this week on taper expectation and inflation fears, the equities may stop the rally and have a tough period.