Posted | by David Moenning |

The bears were probably more than a little disappointed with their performance yesterday. If you will recall, Dow futures had swung from a gain of +165 points just prior to the release of what was being billed as a potential blockbuster CPI report, to a loss of -340 points minutes after. And given the speed at which volatility has been hitting the markets of late, one couldn't be blamed for thinking that the major stock market indices were going to wind up sporting a bright shade of red on Valentine's day.

To be sure, the consumer price data came in hotter than expected. In case you missed it, the CPI rose 0.5% in January and has increased by 2.1% over the past year. The problem is yesterday's report marked the fifth consecutive month that the year-over-year CPI was above 2%. And over the past three months, the CPI has been running at a 4.4% annualized rate.

The song remained largely the same when one viewed the data without those pesky food and energy components. Core CPI was reported at 0.3% in January, which was the biggest monthly gain since 2005. Over the past twelve months, Core prices were up 1.8%. And the recent trend is hot here too as the Core CPI increased at an annualized rate of 2.9% rate over the past three months.

Bonds Noticed

Yes, the boys in the bond pits noticed. After a slow start, the yield on the U.S. 10-Year rose steadily throughout the day, closing at 2.913%, which was a fresh new high for the current cycle.

And don't look now fans, but the yield on the 10-Year now finds itself just another bad day away from 3%, a level that hasn't been seen since the end of 2013 (and then 2011 before that).

As such, our furry friends in the bear camp were quick to conclude that stocks were in trouble and that the "retest" of last week's lows was surely up next.

A Funny Thing Happened On The Way To The...

Sure enough, stocks did open lower as the DJIA found itself down by 150 points within 15 minutes of the opening bell yesterday morning. Quickly there was chatter about breaking Monday's low and the chances of taking out Friday's stunning reversal low. Surely this would embolden the bears, we were told.

But a funny thing happened on the way to the retest. Yep, that's right; it didn't happen.

In concluding yesterday morning's market missive, I wrote, "...For me, it will be interesting to see what the markets do once humans get involved after the open and the "narrative" from today's data takes shape."

No, I didn't actually come out and say that I wouldn't have been surprised if the stock market "round-tripped it" after the inflation news, but I certainly did think it!

And that is exactly what happened. Instead of another scary plunge in prices, a rally ensued. A very nice rally that extended the recovery to 50% of the total decline so far. Not bad. Not bad at all.

The "Narrative"

So... Why did Ms. Market do the exact opposite of what lots of folks thought "should" happen yesterday? Why did the screens finish with a bright shade of green instead of the traditional red for Valentine's day?

While this is merely one man's opinion, my take is that there was nothing "new" in that CPI report. Yes, consumer prices were higher than the consensus expectation. Yes, the trend is starting to show some signs of acceleration. However, the key is that inflation appears to be a side effect of the current economic conditions - not a big, scary problem.

For me, the CPI report didn't provide any reason for traders or, more importantly, the Fed to panic. Heck, there wasn't much in there that would suggest the Fed would even consider changing its course.

Remember, the wage growth component was benign, if not disappointing. And it is hot wage growth that can become a "problem" for the inflation hawks. Then when one factors in the Retail Sales numbers, well, the word "overheating" didn't come up much yesterday.

Does this mean that it's clear sailing from here and that the next stop will be new highs for the stock market? Uh, no. However, with half of the decline now retraced, the argument that the low was put in during last Friday's wild ride is starting to find support.

Thought For The Day:

We do not quit playing because we grow old, we grow old because we quit playing. -Oliver Wendell Holmes

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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