Despite hawkish comments from both Fed Chair Jerome Powell and the European Central Bank, the market reversed some early selling and closed with mild gains. Breadth was 4,700 gainers to 3,500 decliners, but there were less than 50 stocks hitting new 12-month highs.
This is classic counter-trend bounce action so far, but the big question is how much further it can carry. The consumer price index report on Tuesday will likely answer that question.
In his comments on Thursday morning, Powell repeated that the Fed is determined to bring inflation under control and that it will likely keep rates higher for longer to make sure that it does. Despite the clear message that Powell is sending, plenty of hopeful investors who want to believe that the upcoming CPI report will come in soft and that it will influence what the Fed is going to do. But Powell has pretty much already stated that the next CPI report is not going to matter much.
During the market rally in July and August, investors pretty much ignored clear signals from the Fed that no pivot was about to take place. Bulls have a tendency to find a bullish spin even when there isn't any real evidence that one exits. Will they do it again on Tuesday?
Many bulls are making the mistake of thinking that the key issue is whether inflation has peaked. While that may be important psychologically, the most important issue is the duration of these high levels of inflation. The Fed is worried about it becoming entrenched and lasting for years. Just because we could be seeing a peak in inflation doesn't mean that it is going to keep on dropping at an accelerated rate.
This is going to be the primary topic of debate that drives the market for the next few days. The market ran up in front of Jackson Hole in hopes of some dovish relief, and was greatly disappointed. Is it making the same mistake again?
Have a good evening. I'll see you tomorrow.
