Investors Turn Their Attention to the Health of the Economy and Potential Trade Deals
After a giant move on Wednesday, CPI will shift the market focus to how the economy is performing.
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Following the third largest market rally of all time and the best day for stocks since 2008, the market is digesting the move on Thursday. Investors are awaiting an important CPI report and measuring the health of the economy after weeks of painful speculation about the impact of tariffs.
There is discussion about whether President Trump is simply reacting to pressure from investors and businesses or whether this approach was part of a grand scheme to trap China and send a message about the willingness to suffer some short-term pain. Trump has always cared about the stock market's response to his policies, and there is some comfort in the fact that he backed off when he did.
While this shift in tariff policy is a huge relief, that doesn't mean that there still won't be negative repercussions as at least 70 separate trade deals are negotiated over the next few months. There will be negative fallout from China, which is essentially being shut out of the U.S. economic system completely and has not indicated any willingness yet for negotiations.
The best possible news at this time would be some initial trade deals with countries such as Japan and the U.K. and the start of dialog with China. That would ease some concern about the negative impact of the 10% tariffs now in place.
The much bigger issue that has been driven in part by tariffs is the health of the overall economy. Even without the tariff drama, the economic cycle has been shifting to a slowdown, and there has been concern about the stickiness of inflation. The word "stagflation" is being used much more recently while the odds of Fed rate cuts have been ramping up.
A CPI report is due on Thursday morning, which will trigger more discussion about overall economic health. It is anticipated that the report will be fairly tame, with a 2.5% annual headline number and a Core CPI of 3.0% annually, which would be a four-year low. An in-line report would be positive news.
The most important technical question now is whether there will be dip buying support after Wednesday's giant move. Will investors who were shut out start looking for entry points on pullbacks? Is there FOMO developing, or are short-sellers going to aggressively reload?
I added exposure on Wednesday, but I still have plenty of buying power and will be watching to see how price action develops. The next big positive catalyst will be some trade deals, but there is no clear time frame for them at this point.
At the time of publication, Rev Shark had no positions in any securities mentioned.
