CPI was the signal to play aggressively
(These are the market notes on today’s action by Mike Santoli, CNBC’s Senior Markets Commentator. See today’s video update from Mike above.) The market took a better-than-feared CPI report as a signal that it’s free to play looser and more aggressively. Given the magnitude of the downside shock in the Aug. 1 payroll report , CPI would have had to come in piping hot to undermine the Street’s conviction that the window is wide open for the Fed to resume rate cuts in September. The modest upside to core CPI fell well short of that threshold. The result was a tension-release rally in a market that wasn’t all that clenched-up to begin with. Rate-sensitive stocks are flying as traders execute the Fed-easing playbook – small-caps, transports, homebuilders, retailers. The First Trust Nasdaq Community Bank ETF (QABA) is up 3.9% on the day. Economists will, and should, point out that CPI inflation remains sticky and well above the Fed’s 2% target, but markets, politics and Fed rhetoric are forcing a view that rates have room to fall to make them “less restrictive.” The market sees CPI as the last known potential catalyst that could have truly upended the bullish case until Labor Day, even though we’ll get retail sales, some consumer earnings and a lot of Fed rhetoric in coming weeks. The VIX dropping appreciably below 15 for the first time in six months shows this collective relaxation. Are we calling off the August hurricane watch? Treasury yield curve steepening a bit, longer-term yields holding up as short-term yields slip to price in somewhat more certainty about imminent rate cuts. The rally to new highs in the S & P 500 and Nasdaq came after a couple weeks of internal consolidation when the majority of stocks were in pullback/digestion mode while the elite AI-propelled mega-cap tech names held the indexes aloft. Today was a bit more of an inclusive push higher rather than a rotation, Big Tech participating fully while cyclical stuff regained some pep. Around the edges, the frisky, gamy stocks are bubbling up again. AST SpaceMobile up 8.3% on a quarterly miss. The recent IPO ETF (ticker FPX) was up 1.4% at a new high. The BUZZ meme-stock proxy ahead by 1.8%. None of this amounts to broad, worrisome euphoria. The two-week rally pause allowed optimism to cool and, according to Goldman Sachs institutional positioning remains near neutral. Still, this meltup-type action suggests risk-aversion is being penalized, the valuation-based margin of safety is getting further compressed and the expected rate cut(s) could end up being used recreationally rather than medicinally to heal an ailing real economy. Or, perhaps, it could do some of both.
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