The Consumer Price Index was cooler than expected in June, while the Producer Price Index was warmer. Equity traders responded by selling winners and buying losers.

 

CPI inflation fell further than most expected as easing prices for gasoline and other staples like food and new lease rents cooled dramatically. That information might help the level of anxiety people are feeling about inflation. It appears that the price points of most staples have finally flattened out year-over-year instead of constantly going up as they have for the last few years. 

 

Countering that good news, wholesale prices climbed 0.2 percent last month led by prices for services, which offset a decline in goods prices. The May PPI numbers were also revised upwards as well. However, the CPI news trumped the disappointing PPI data on the nation's trading desks.

 

Fed Chairman Jerome Powell's testimony before Congress this week paved the way for the inflation data. On Wednesday, in his testimony before the Senate Banking Committee, he said, "More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent."

 

His semiannual congressional appearance at the House Financial Services Committee a day later was also encouraging. Powell hinted that the environment for rate cuts is approaching citing a jobs market that is slowing down. He also said that the Fed had been heavily focused on inflation but is now getting to a place where the labor market is drawing more of their attention.

 

Recently, the labor market data indicated that the number of jobs is declining. Powell clarified that he and his committee are increasingly aware of the risks posed by a cooling labor market. His comments kept the equity market well-bid for most of the week and the inflation data announcements were simply the cherry on the bull's cake.

 

Based on Powell's testimony and the cooler CPI data, the betting for a rate cut by September skyrocketed to more than 90 percent. Both the U.S. dollar and bond yields plummeted as a result. However, at the same time, a massive shift occurred as momentum and program traders sold down the ten or so large-cap stocks that have driven the averages higher, while buying hand-over-fist areas like precious metals, China, emerging markets, small-cap stocks, industrials, and real estate.

 

All the above areas benefit the most from a declining dollar, lower interest rates, or both. This could be good news for the health of the market if this trend were to continue. I have written about the concentration risk (too few stocks going up) that has gripped the market over the last few months. For the markets to continue to gain, we need to see a broadening out of stocks that are participating in the upturn.

 

If the market were to rotate out of some of its FANG/AI holdings into other equity and commodity areas, there likely would be a period of consolidation and volatility in the markets. I have been expecting higher highs into mid to late July followed by a period of consolidation. As of right now, I am on target and await further developments.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.