Inflation running hot again
Quick summary:
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CPI inflation came in hot, at 3.8%, while core was at 2.8%, both higher than expected. Fed rate hikes are getting priced in. We are clearly in Quad 2 regime: inflationary boom.
Daily Trend: Price remains well above the 50-day SMA (725) and 200-day SMA (696). However, RSI has cleared 70, signaling an overbought state.
4-Hour Trend: Showing signs of momentum exhaustion. Despite a positive histogram, the MACD is flattening, and volume is beginning to thin as we approach the psychological 740 to 742 resistance zone.
Apart from the CPI that came in today, we get PPI tomorrow and retail sales on Thursday.
The CPI report that came in before open today soiled the bullish narrative. Inflation was reported to be at 3.8%. This is early/mid-2023 levels of inflation. It is surely a consequence of the March oil shock, finally being priced in throughout the economy. The only good news is that core inflation (minus food and energy) has pretty much moving sideways for the past 12 months, although it too came in a bit higher than expected.
The immediate consequence? Repricing of Fed rate hikes. Just a few days ago I showed you this chart where 2-year forward expectations were basically anchored around 3.5%, which I called unrealistic and not likely to stay this way. Well, they didn’t and the pendulum swung in the other direction, towards pricing in rate hikes. At least 25bps hike is not priced in for 2027. Not the best of signals for the bulls.
What does price action have to say about all this?
There is still some room for a downside retest (in the 728-731 zone), and then even more (716) for a bigger retest.
The market is currently wrestling with an overextended rally. After an impulsive move off the April lows, the daily trend remains firmly bullish, trading well above the 50-day SMA (725) and 200-day SMA (696). However, the technicals are starting to flash yellow. On the daily chart, the RSI has pierced the 70 level, signaling overbought conditions, while the 4-hour MACD shows signs of losing steam despite the positive histogram. The current price action suggests a grind up environment where momentum is stretched but not yet broken. We are essentially trading into thin air; the immediate resistance sits at the 740 to 742 pivot zone, with a secondary call wall at 752 where dealer hedging could stall any further vertical moves.
Looking at the likely scenarios for the upcoming week, the path of least resistance remains up until a structural shift occurs, but a mean-reversion pullback is overdue. If the SPY fails to hold the immediate 4-hour support at 735, we could see a quick rotation back toward the 732 gap or the deeper 725 demand zone. The macro calendar is the primary catalyst for this shift: after today’s CPI, we get PPI on Wednesday and Retail Sales on Thursday. These reports will dictate whether the inflation cooling narrative holds or if the market needs to price in a higher for longer stance from the Fed. Until then, keep an eye on the 732 level; a full-body close below it would be the first real signal that the daily momentum has finally rolled over.
The competition
With the S&P 500 stretching its winning streak to six weeks, the market is entering a “show-me” phase where record highs must now contend with a critical April CPI print and the high-stakes transition of Fed leadership. As we reveal this week’s competition results, the top of the leaderboard belongs to those who looked past the AI-driven euphoria to correctly price in the stagflationary risk of oil-induced inflation and a potentially more hawkish Fed under the incoming Warsh regime.
Stay focused and keep climbing the ranks!
NOTE: For all those new to the whole thing, read more about it here or watch a video of Scott and myself guiding you through the survey, showing you all its features, and briefly explaining how the competition works.
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