The primary issue driving the market right now is that the chances that the Federal Reserve will hike interest rates by one-half percentage point at its next meeting in December are about 85%. That is all that really matters right now. Any incremental news is only important to the extent that it shifts those odds.
On Tuesday, the latest Producer Price Index (PPI) number increased those odds slightly, but the news of a bomb hitting Poland produced sharp intraday volatility that caused a distraction. Here on Wednesday morning it appears that the bomb accidentally may have come from Ukrainian territory. Emotions have cooled and we have quiet action very early.
At 8.30 a.m. ET, retail sales data for October will be released. A strong number may indicate no immediate threat of a recession, but it may cause additional fear of inflationary pressures. To some extent, a strong number will be driven by higher prices that are a product of inflation. The data can cut either way, but what we need to watch is whether there is any shift in anticipation of a one-half percentage point hike.
The primary battle that is taking place in the market right now is between the bulls, who are focused on the near term and the likelihood that the Fed will be a little less aggressive with rate hikes, versus the bears, who are focused on the longer term and the many economic obstacles that lie ahead. The Fed has made it quite clear that a couple soft inflation reports and a slower pace of rate hikes do not mean that it has accomplished its goals. There is still a good likelihood that inflation could spike again or that economic slowing will pick up. The danger of a recession is not insignificant.
However, in the short term, the bulls have the edge. The Fed is likely to be a little less hawkish, positive seasonality is working, the charts are favorable, and there is no significant data report due until the next Consumer Price Index report in December. The next Fed meeting isn't until Wednesday, Dec. 14. There are plenty of Fed speakers in the interim, but their message doesn't have much impact now.
Short term, the indexes are a bit overbought, and we saw how that could be a problem when news such as bombs hitting Poland can cause a quick move. The cryptocurrency market seems to have settled down and isn't impacting sentiment right now.
We will see if the bulls can keep the momentum going, but they have some short-term overhead to overcome, and the longer-term economic picture is not improving.