Although Wednesday's CPI report was almost exactly in line with expectations, the market viewed it as a positive indication that the Fed would pause hiking interest rates. That was already well anticipated by Fed Funds Futures, but the bulls used it as an excuse to buy big-cap technology names that benefit from lower inflation.
The PPI report is out Thursday, and that will also impact the narrative on inflation. Weekly unemployment claims will also garner a market reaction as wage inflation continues to be the primary concern of the Fed.
The bullish narrative is that the Fed is going to aggressively cut interest rates later this year because inflation is dropping sharply. According to the bulls, there is no reason to expect a sharp economic slowdown as earnings are coming in nicely, and there have not been any major drops in estimates. The bulls believe that the market can continue to rally right into some Fed rate cuts. The skeptics will just be fodder to push the market higher.
The bear's position is that the Fed will only cut rates aggressively if there is some substantial economic slowing or the bank crisis deepens. They believe that the bulls are fighting the clear message of the Fed that they will not be cutting rates and expect a mild recession.
The bulls are winning the argument right now -- and the biggest beneficiary is big-cap technology. The Nasdaq 100 (QQQ) is outperforming while smaller stocks continue to lag. According to strategist Tony Dwyer, the top eight stocks in the S&P 500 account for 105% of its gains.
There are many other stats that illustrate the narrowness of this market, but the big-cap names that are performing the best drive the indexes, and the indexes drive sentiment. Market participants don't do much digging. They see stocks such as Alphabet (GOOGL) and Amazon (AMZN) acting well, and from that, they conclude that the entire market is healthy.
What is really happening is a very lopsided rotation. Money is flowing into these large-cap names because they are viewed as safer than any alternative. They are even receiving some flows due to the theory that they are safe should the debt-ceiling issue become a bigger problem.
The Nasdaq 100 has positive momentum right now, but breadth will be the measure of overall market health. We need to watch for rotational action and see if there is some broadening in the action.
Bullish price action is overwhelming the bearish economic arguments, but the price action isn't that great.
