Have We Reached the Point Where All the Good Stuff Is Already Priced In?
The question today is whether CPI will differ enough from expectations to influence the level of the Fed's dovishness.
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Recently, all news has been good news for the market, as weak economic news is celebrated as pushing the Fed to be more dovish. In addition, strength in the AI group, a high level of speculative interest in secondary stocks, and new all-time highs are keeping sentiment positive.
The primary question confronting the market at this juncture is whether we are reaching a point where all the good news has already been fully priced into the market. At some point, weak economic news is no longer going to be positive because there are limits to how much the Fed will cut interest rates.
The August CPI Report that will be released at 8.30 a.m. ET is expected to show growth of 2.9%. That is still well above the Fed target rate, but the market is no longer as concerned about inflation as it was prior to Jerome Powell's comments at Jackson Hole. In that speech, Powell indicated greater concern about slowing employment, and that has been the key issue. He also indicated that some of the inflationary pressures may be transitory as the tariff issue is digested.
The big question Thursday is whether CPI will differ enough from expectations to influence the level of the Fed's dovishness. Currently, there is nearly a 100% chance of a quarter-point cut next week and an 8% chance of a 0.5% cut. A very soft report could ramp up hopes of a half-point cut, but the great likelihood is that the odds of cuts in October and December increase to near certainty as well.
Does the market still have more room for upside if the CPI report is soft? Expectations are that CPI is not going to be a negative issue, but the indexes are at highs and technically extended. How much more can they run on what is essentially the same good news?
There was some stalling in the price action on Wednesday, and the potential for a "sell the news" response to a "good" CPI report is high. There is likely to be good support and dip buying on pullbacks at this point, but the reaction to CPI will tell us quite a bit about how much longer bad news is going to be good for the market.
At the time of publication, Rev Shark had no positions in any securities mentioned.
