This Needs to Happen Before Stocks Can Produce a Sustained Rally
Investors are looking for a friendly CPI report, but inflation worries aren't going away
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The key issue the market faces Wednesday morning is whether worries about inflation will continue to put pressure on equities. Interest rates have been rising steadily for months, and there is growing concern that Trump's policies will increase inflationary pressure.
Worries about inflation have continued to reduce the odds of a Fed rate cut in 2025. There is now the likelihood of maybe one or two cuts, and the Wall Street Journal asked this morning, "What if the Fed U-Turns and Raises Rates This Year?"
The building worries about inflation make the CPI report on Wednesday more important than usual. In-line numbers will help, but this issue will not go away quickly or easily. Earnings season is also starting Wednesday morning with big banks, and there will be a lot of talk about how inflation is impacting corporate results.
The good news is that inflation worries and the uncertainty of the Trump Administration have already produced fairly deep corrective action. Both the Magnificent Seven MAGS and the Russell 2000 IWM have pulled back and are hitting technical support levels. While conditions are good for a bounce, the development of the narrative will be key.
The Goldilocks economic narrative is what powered the market for most of 2024. The view was that inflation was still running higher, but economic growth was strong enough to offset any concerns. It wasn't too hot or too cold.
The market is now confused about whether growth will be good enough to offset inflationary pressures. Bonds have been flashing a warning signal for a long time, and they need to find support and turn back up before the market will act better.
For very short-term traders, there is a high level of volatility, and with earnings season starting, there will be even more. The problem is that there is no clear trend, and if you aren't trading very short term, then you are likely to be whipsawed.
CPI will be out at 8.30 a.m. ET, and the early market action looks hopeful.
At the time of publication, Rev Shark had no positions in any securities mentioned.
