The market rallied early this morning for reasons nobody predicted and nobody can explain. Lack of conviction? Probably. Repositioning going into Friday’s Triple Witch expiry? Likely. Profit giving followed by profit chasing? Definitely. Either way, US markets drifted sideways throughout the afternoon, then rallied into the close again with nary a positive headline in sight (but recession signs in the form of inverted curves ever present).

The worst hit on The S&P since June 2020 and The Nasdaq 100’s biggest intraday drop since May 18th , has left The Fed with no alternative but to slam on the brakes of the economy, with even tighter financial conditions. Or rather, hot inflation and labor markets have left The Fed with no other option. Today’s CPI print (and gap higher in the Fed “Terminal rate”) has basically served to increase the odds of a dreaded “Hard Landing.” Traders had built in muted expectations for the CPI today. Lower energy costs should lower inflation, they said. It will be easy, they said. “They” weren’t expecting the other parts of the index to rise. There was plenty of speculation around in terms of what caused CPI ex-Energy to miss, but with so much of the basket moving higher, it’s clear there’s a larger, more persistent trend at play. The odds of a 75bps hike now stand at 66% and 100bps now at 34%, though more aggressive hike expectations could leave investors pleasantly surprised when the time comes. The result of today’s shocker was the undoing of the last 4 days of positive moves. The SPX fell back below 4000 (support at 3900), and the Dollar (DXY) ramped back up +1.4%. The weakness in equities was broad based, with ZERO stocks in the green for the NDX, and only 5 for the SPX. That said, we still remain in the same range we have been ranting about – even the 10 year’s move higher (up as much as +22bps at one point), stopped short of the 3.5% resistance level we have been watching. All sectors closed in the red, with Energy the “least bad” after commentary from OPEC indicated continued strong demand (though the sector is still hanging onto +1.7% worth of gains this month and +44% ytd). Biden’s commentary on the Inflation Reduction Act this afternoon and news that Twitter (+0.8%) shareholders approved Elon Musk’s $44bn buyout, was mainly ignored. But Triple Witch and CTA positioning cannot be. And we’d bet the PPI release tomorrow will now have everyone’s attention.

New month, who dis? Actually, it may be a new month, but this is same old market in the same old range. It did appear as though we would see a 5th down day in a row by the SPX for the first time since mid-July, but just as the index got close to its 3900 support level, it held and got a slight boost, closing in the green (though the CCMP closed down 40bps). Semis were a major drag —The SOX (-1.9%) was weaker thanks to Nvidia (-7.7%), which was weighed down by concerns over restrictions on sales in China. Also, Energy (XLE) and Metals & Miners (XME) fell for another day – the latter has suffered the last 5 days running. It feels as though there are still plenty of storm clouds hanging over the markets, but there was no panic and thus, we remain in wait-and-see mode. There have been plenty of signs that indicate recession potential – 1) negative trend of Leading Indicators 2) 55% of US yield curves inverted 3) Monthly supply of new houses exceeded 9 months…Further, the Dollar was up another 90bps today, now +14.7% ytd, its third best year since Nixon took the dollar off the gold standard. Also, questions remain around inflation in concordance with mixed economic data. Today’s claims number was below estimates –the lowest since June, ISM data stayed the same m/m, while the PMI # was the lowest since July 2020, but remains above 50. To that end, tomorrow’s NFP feels critical. However, The Fed has advertised their hawkish narrative so thoroughly it’s hard to imagine much will come from the data. That said, September is historically the weakest month for equity returns and with the Fed hell bent on their play book, US investors will be begging for the long weekend ahead.

Today was spent recalibrating expectations now that the ‘dovish tilt’ is more of a distant spot in the rear view mirror. Following the ‘we will keep at it’ message from Powell on Friday, we also got messages of ‘larger sacrifices’ from ECB’s Schnabel and France’s Villeroy over the weekend, and this week we have a long list of Fed speakers poised to chime in. Markets felt hesitant today, as a UK holiday and an upcoming US holiday stifled activity. Fed fund futures are now implying a year end rate of c3.75%, and cuts sometime in 2023, contrary to what officials are saying, which leaves room for further interpretation this week. Economic data will still be a major focus for all parties, of course. The Dallas Fed Manuf. Survey came in below estimates this morning, although the 6 month outlook improved from -17.7 last month to -8.8 this month. This just added to the mixed messages that economic data continues to send —things are seemingly improving, but inflation is still rife. Either way, markets attempted to make a move into the green today, but it was a struggle and ultimately failed. The breadth for the S&P remained negative all day (55% decliners), clearly a drag on the index. With Value outperforming Growth again (1.3%), some of the growth ETFs tested their supports. Semis, Software and Comm fell below their 50-day averages, led lower by their constituents— Google (-86bps), Microsoft (-1.1%) and Meta (-1.6%), to name a few. With Oil +4% today and the 10yr back above 3%, its highest level since late-June, the Growth vs UST debate is likely to heat up…just as summer does the opposite.

A sobering day of red as the S&P (SPX) saw a 95% down day and the Dow (INDU) pitched a no hitter with a 100% down day (down over 640 points, though there are only 30 stocks in the Dow). We were watching for support levels of 4177 on the SPX and 12,900 on the NDX, neither of which held today. Next stop for the SPX is 4112 then 4079, and the NDX’s next stop is the 50dma of 12,346. Today’s weakness did not discriminate — every sector was in the red. Semis were the worst performers led lower by NVDA (-4.6%) and ON (-5%) after Citi put out a negative report on chip makers. Palo Alto (-1%) reports after market today and Nvidia and Splunk (-2.8%) both report after the close on Wednesday. But the chip makers were not the only culprits —Apple (-2.3%), Amazon (-3.6%), Microsoft (-3%) and Tesla (-2.3%), which make up a major chunk of the larger indices, also heavily contributed to losses. Amazon weakness was due to its battle with United Health (-0.7%) over Signify Health (+32%). Separately, Ford (-5%) was also crushed after a $1.7bn ruling in a pickup truck accident in Georgia. Aside from major equities moves, the other story was dollar strength (and EUR weakness) in which we see 120 as the next target. We were also keeping a close watch on the 10yr breaking 3%, an achievement which could now lead back to 3.25%. The Chicago Fed Nat Activity was positive this morning, a good sign, but this week will bring even more eco data (PMIs, GDP), as well as Jackson Hole on Friday. It seems as if the market is coming to terms with the fact that rate cuts are still far off. It’s now a near 50/50 split on whether we get 50 or 75 bps next month. With the VIX up +16% but volumes down 13% today, the extreme moves were unsurprising. And also disconcerting. Though of the Mondays that fell 2% or more in the last 10 years, 75% had an up day Tuesday.

Green was noticeably absent from the screen today as markets took a well-deserved pause from the recent rally. Based on the lack of volumes (SPX -15.5% vs 20d), as well as the fact that both the S&P and NDX failed to go below their support levels (4190 and 13k, respectively), the weakness felt fleeting. After all, 21% of the SPX still advanced and the selling was not elevated (using overall volume as an indicator), so there were no signals to indicate a permanent change to upward momentum. There was nothing sinister to instigate the fall which began with futures’ weakness pre-open. Retail sales data stagnated last month as we saw declines in auto and gas spending, but gains in other categories suggested spending still remains resilient. Net/net — the number wasn’t great, but TJX (+2.8%) and Lowe’s (+58bps) reporting better than expectations helped balance the weaker number a bit. Quite frankly, the most annoying move was of the meme-madness sort in Bed, Bath and Beyond, which was up another 12% (up almost 65% this week alone) defying all laws of physics. No comment.

While economists expected another modest rise in inflation on a MoM basis, they did not expect headline CPI to slow significantly from 9.1% to 8.5% Yoy, ending a 16-month streak of gains. But what is in a CPI? Quite a bit, actually. Shelter costs (which continued to rise), food prices (which continued to rise), services inflation (which continued to rise), and energy and goods prices, which mercifully, slowed. But perhaps most importantly, was the real average weekly earnings which continues to plunge, (down 16 straight months) proving inflation has eroded wage gains. And yet. And yet. The market loved it, whether the drop in CPI was enough to signal a Fed pivot or not. Rate hike odds highlighted a collapse in tightening expectations and risk was back on today baby! Tech led the cause (as we quickly forgot misses from NVDA, MU, RBLX and COIN this week) while telecoms, staples and energy brought it up the rear. We are now through two technical levels– above the 4177/4200 resistance levels on the S&P and below 105.5 on the DXY. The dollar move signals a real change in the markets, and also could serve as a tailwind for companies who were hurt by USD strength this past quarter. As with risk on, so goes yields higher and it’s worth noting in the 10y auction indirect bidders took 74.5% of the print, the highest ratio since Feb. Finally, The Fed’s Kashkari didn’t have anything new to say. The Fed will raise rates and sit there until inflation eases…they are unlikely to cut rates with a high CPI…they are still shooting for 3.9% by year end. Thus, the probability of a 50bp hike in September nearly doubled since yesterday. Investors have chosen to slice this as very positive for equities. After all, we are seemingly past “peak inflation.” But, with inflation still at 8.5%, it’s hard to see how that could be good for anyone.