Investors and traders were relieved to see the inflation data lower than expected from the July reading. The lighter numbers seem to point toward lower prices in energy, gasoline products and some energy/utility along with natural gas. Those commodities have been coming down since June, so it comes as no surprise to us. Indeed, the Cleveland Fed's nowcasting for inflation signaled the low month-over-month reading toward the end of July, so this really should not have shocked anyone (note: its forecasts are pretty accurate). Last week's upside surprise on jobs pushed the Atlanta Fed to boost its GDPnow forecast for the third quarter to 2.5%, a pretty big jump from the prior week of 1.4%.
Still, prices remain elevated as the year-over-year numbers for both the Producer Price Index (PPI) and Consumer Price Index (CPI) remain at stunningly high levels, and the Fed cannot be happy with it. Core inflation remains very hot, which strips out food and energy. While the job market still seems strong, productivity was once again a negative in second quarter and unit labor costs are also higher than expected. This all means less bottom line for businesses while needing to hike prices to deal with higher raw material costs and perhaps a slowing consumer. It's hard to see the positives here, but the stock market is certainly trying.
From the recent lows two months ago the stock market is up a tremendous 15% (S&P 500) over that span. Even so, the index is under water for 2022, though it is gaining ground quickly. We noted in our rundown Wednesday the potential clash of two celestial bodies -- the big downtrend line that started from the beginning of 2022 and the price action thrust from the lows in mid-June. We could see these two come together very soon and perhaps near the 4,300 level, where big decisions will be made (sell into the resistance or keep on buying for the rally to continue).
Earnings this week remain a mixed bag. Walt Disney Co. (DIS) beat and provided a bit of color for the rest of the year as it increased prices. This seems to be the theme for the rest of 2022, which creates more uncertainty as we move into the fall.
Technically, the markets are still very overbought and could be vulnerable to a pullback at any time. Oscillators are swelling, but breadth remains the one indicator that is leading the markets higher. Strong breadth means more buyers are showing up.
An interesting stat this month: Of the nine trading days so far in August, seven of those days for the S&P 500 ended down and only two were up. Those two were Aug. 3 and Aug. 10. Based on the preceding, you might expect the S&P 500 to be down for the month, but no, it is actually UP 1.8% so far in August! Pretty incredible that two sessions this month have carried the markets higher.