The big worry for the market was a growth slowdown, but continued relief on inflation is the market story this week. The July consumer price index report was the last hurdle needed to give the all-clear for a Federal Reserve rate cut in September. Prices excluding food and energy rose 0.2% month over month, in line with expectations. Year on year, they gained 3.2% — also in line. The CME FedWatch tool, which measures market expectations for changes in the federal funds rate, shows a 58.5% probability of a 25 basis-point cut in rates in September and a 41.5% chance for a 50 basis-point cut. Investors are betting on lower rates in Treasurys as well. JPMorgan’s Treasury client survey showed net long positions among clients at their highest since December, Bloomberg News reported . Stocks are opening up, with semiconductors — which are the tip of the spear for any broad rally — leading. This is the second day in a row that stocks have reacted with relief to an inflation report. Yesterday’s July PPI pushed stocks up. That rally was so strong that Home Depot, which gave disappointing guidance for the year in its earnings report and was down in premarket trading, rose on the inflation report and ended the day up 1.2%. Where are we? The S & P 500 is now back to where it was just before the disappointing jobs report on Aug. 2. The S & P technology sector ETF (XLK) is also back to levels before the jobs report. Tech bellwether Nvidia is trading above its close on Aug. 1. The Cboe Volatility Index (VIX) has collapsed to 17 — also where it was just before the jobs report. Despite the growth scare that followed the jobs report, there are no signs of an imminent recession. The Atlanta Fed GDPNow model estimates GDP growth of 2.9% for the third quarter. Earnings are remaining steady. Third-quarter estimates for the S & P 500 are slightly lower than when the quarter began (up 13.6% year-over-year vs. up 14.8% on July 1), but that is entirely normal. Estimates tend to decline after the first month of the quarter, as analysts adjust overly-optimistic estimates. Overall estimates for 2024 are little changed (up 10.5% year-over-year) and for 2025 as well (up 14.9%). So, what do we have? We have easing inflation; a modest growth scare that has markets betting on easing; and a modest valuation reset in tech that is quickly reversing. Seems like the softish-landing scenario is still alive, with investors quickly snapping up part of the market that were 5% cheaper a few days ago. We’ll see about retail sales, due Thursday. That metric has been trending lower. Investors are convinced there is a slowdown in the consumer, and based on earnings reports, there is good reason to have that concern. That could be a catalyst for another modest sell-off. For the moment, it seems like a hard sell to argue to bail out of stocks. We may not have a big reason to move to new highs, but relief on inflation is the big story.
