Surprising Inflation News Sucker Punches the Market

The market action was mixed to start Tuesday when surprising strong inflation news in the services sector hit and caused a wave a selling. The ISM Services Prices Paid Index hit a 22-month high of 64.4. This caused bonds to drop sharply and interest rates to climb to their highest levels since 2023. With data points like this, not only will the Fed likely fail to cut rates in 2025, but there will also be talk about possible rate hikes.

After a big day on Monday, the Magnificent Seven MAGS is leading to the downside on Tuesday with a drop of around 2%, which fills the gap in the chart that was created Monday morning. Market breadth isn’t too bad so far, but it is moving toward 2 to 1 very quickly.

The most important technical issue will be whether we close at the lows. An uptick in inflation isn’t a huge surprise and is part of the reason that the indexes have not made any major progress for a while, but how much is priced in already? Bonds have been in a steady decline since September when Fed Chair Jerome Powell made his dovish pivot, so there is a lot of bad news already priced in. We will see if selling picks up intraday. A close near the lows will put fear of the bear into a few folks.

I’ve been hoping to focus much more on stock picking, but this macro news isn’t going to allow me to do so. When you have interest rates moving like this, then it is mostly index-driven action, and quality stock selection won’t protect you.

The biotechnology sector was looking very good before this news hit, but now we will have to wait for this inflation scare to play out.

One name I’m watching closely for a trade is Rocket Pharmaceuticals RCKT, which I've discussed at length, and which will be presenting at the J.P. Morgan Healthcare Conference next Monday afternoon in San Francisco. Viking Therapeutics VKTX and BridgeBio BBIO will also be present.

At the time of publication, Rev Shark was long RCKT, VKTX and BBIO.