On Friday, the market bounced back from hotter-than-expected jobs news and wage data, but the issue as we start the new week is whether the indexes can gain further traction as we head into CPI and the Fed interest rate decision next week.
There aren't any major economic reports coming up this week, but there is intense debate over how inflation is primarily driven by the strong employment numbers and the potential for a recession next year.
The bulls have been optimistic about further upside into the end of the year as they anticipate positive seasonality combined with poor positioning. The bullish narrative is that inflation is starting to slow, and the Fed has signaled that it is going to reduce its rate hikes to 0.5% at its next meeting in a little more than a week.
The bears are scoffing at this optimism as the Fed has made it quite clear that a slowdown in rate hikes does not mean that the battle against inflation has been won. Jerome Powell made it very clear that although there has been softening in energy, food, and housing inflation, there is still major pressure caused by wages. It is going to take a series of higher rates to soften the jobs market to deal with this issue.
There also is concern that economic growth is slowing quickly and that a recession will gain traction early next year. The market has been primarily focused on the problem of inflation, but the problem of slowing growth is becoming more evident.
Technically the indexes are facing overhead resistance after a good run, and the economic debate is becoming very loud. China softened its stance on Covid, which is giving China-related names a boost, and OPEC is not going to be increasing the oil supply, which is driving up oil this morning. The dollar is weak on this news, and bonds are showing strength as recession concerns are building.
The biggest danger right now is that bulls seem quite confident about positive seasonality to keep things running. The reopening in China has been priced into the market to some degree already, and there is going to be some aggressive positioning in front of CPI and the Fed rate decision next week.
My game plan is to keep trades very tight and not chase strength. The economic risk is very high, and market players have consistently made the mistake of too much optimism all year.
We have a mixed start to the day as China and oil are trading higher.
