This is Mike Santoli, Senior Markets Commentator at CNBC’s daily notebook for ideas on trends, stocks and market stats. A forecast CPI report with softness at its core confirms the market’s recent migration towards risk and growing confidence that the Federal Reserve is all but done with tightening and a refusal to ignore the chance of a soft economic landing. All in all, the result for stocks is hesitation near a pivot point for the S&P 500 – its 200-day moving average and the downtrendline from the January 2022 peak. In the very short term (like on a five-day change scale), the S&P has P slightly stretched at Wednesday close. However, this is not as much as, say, mid-August before this reversal down. The index is only back where it was four weeks ago (and since the early May low, which was before the last 350 basis points of the Fed’s tightening). I said this week that the burden of proof is shifting to investors who insist inflation will remain high, and the outright decline in core monthly services (ex-rent measures) confirms that notion. Who knows where inflation will eventually settle down, but there is downward momentum at the moment. The bond market is completely out of the inflation story and longer-term yields are rising. The Fed will now make one final hike, two or even three small ones, but then will likely pause soon to see the delayed impact on employment, financial conditions and consumer prices. There is a good debate going on about the link between inflation and the labor market. Inflation has come far from boiling point with no drop in employment (claims are still low, unemployment is at 3.5%, vacancies and layoffs are cooler but still strong compared to the past). – In the 1990s, the Fed thought unemployment below 5% to 6% would accelerate inflation, but that turned out to be wrong. – In the 2010s, the Fed was unable to lift inflation to its 2% target even as unemployment fell to historic lows, so the central bank does not need to aim for a material weakening of the labor market to tame inflation bring it back to an acceptable level? Several separate themes are fueling early moves into equities this year: Consumer Discretionary cheers on lower rates/steady income growth for now; Hard asset and capex/reopening games in China work (industry, materials); Big tech is getting some respite from the brutal liquidations late last year and eased pressure from bond yields. The former boom-era speculative tech is now two years past its peak and many of the stocks have been at their lows for some time. Some bases might form in the lucky ones, but don’t expect this group to return to glory. Bubbling here doesn’t bode well for Fed sentiment and responsiveness dynamics, but we’re a long way from that. More generally: – Sentiment is warming from very bearish levels. -Volatility eases in both stocks and bonds with index stability, most of the major data is in and the earnings season brings more name action ahead of macro focus and the Fed meeting in about three weeks. -Earnings expectations look beatable for the fourth quarter after major cuts in forecasts, although forecasts could weigh on forward estimates. Credit markets are quite supportive for now. Throughout 2022, it was wise to sell on rallies in the S&P at or above the 200-day moving average and when the VIX has fallen to or below 20. Both conditions are here or near. This is a nice test of whether the character of the market might be changing. Very few seem to believe the rally off the October low is “the real thing,” which is a net positive. Market breadth is back positive and remains one of the strongest features of the last few days’ action – starting to see a significant excess of fresh 52-week highs over lows, evidence of firming demand for shares. Some of this comes from 2022 stragglers receiving mechanical relief. So far we haven’t seen an impressive “momentum boost” – and still no decisive move above obvious resistance levels. But it’s still moderately constructive.
https://www.cnbc.com/2023/01/12/the-sp-500-and-the-vix-approach-key-thresholds-which-could-test-the-markets-mood.html The S&P 500 and VIX are near important thresholds that could test market sentiment