“Hot” PPI Puts Bulls in Danger

Stocks fell again this morning after the July Producer Price Index (PPI) was released. The S&P registered a drop of 0.3%, heading toward a second week of losses while the Dow clung to a small gain of 0.2%. Big gains from UnitedHealth and Honeywell powered the Dow to a positive session.

The tech-heavy Nasdaq Composite, on the other hand, didn’t share the same luck, falling by 0.9%. A considerable sell-off in semiconductor stocks like Advanced Micro Devices, Nvidia, and Micron, fueled the tech dip.

Yesterday, investors happily greeted (at least temporarily) July’s Consumer Price Index (CPI) reading, which mostly matched expectations. Stocks rallied before tumbling into the close, however, as persistently high core CPI readings (excluding food and energy) weighed on markets.

Disney emerged as the lone beacon of positivity in yesterday’s session, propelled by a strong earnings report that was revealed Wednesday evening. The entertainment giant saw its shares surge by a whopping 4.7% over the week.

For most other stocks, though, it’s been another tough stretch of trading. Today’s PPI release made it even tougher.

Diving deeper into the numbers, July presented a 0.5% uptick in the index for final demand services. A major contributor to this increment was a sharp 7.6% elevation in prices related to portfolio management, accounting for 40% of the July surge in final demand services. On the tangible goods front, July showcased a modest 0.1% rise.

The PPI’s disinflation over the last few months has conjured up hopes of a possible slowdown in the CPI. But after today’s report, fears of rebounding inflation have emerged.

It’s also hard to ignore the peculiar relationship between the stock market and portfolio management costs. In a paradoxical twist, while stocks face headwinds due to hot PPI, a key factor to July’s PPI “beat” was escalating stock valuations themselves.

The larger picture, however, portrays a stock market navigating a volatile phase after basking in the sunshine for the initial half of the year. All three major indexes, as of now, sit below their starting points for August.

Sam Stovall, chief investment strategist at CFRA Research, correctly summarized how paralyzed traders have become following the CPI and PPI:

“Investors are pulling petals from a daisy saying the Fed will raise rates, the Fed won’t raise rates again, when they meet in September.” He further added, “Because of this uncertainty, the market really is just sort of range-bound.”

The University of Michigan’s Consumer Sentiment Index also came out today, showing a reading of 71.2, matching expectations. That’s down from last month’s reading of 71.6.

Consumer expectations of future inflation fell, too. Consumers now anticipate inflation to hit 3.3% next year.

“In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago,” said survey director Joanne Hsu.

Stocks clearly lack direction and investors won’t get much help in that regard considering there’s no August Fed meeting. This has been a seasonally weak month for the market and with the S&P now lingering near support at its June highs, the risk of a deeper retracement is absolutely on the table.

If yields continue to rise, it may only be a matter of time until that retracement arrives.


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