Stocks are rallying above the Powell "Put" and relief from Biden's Strategic Oil Release, lowering costs at the pump. Consumer Confidence has risen slightly, Markets are still mispricing inflation.
With the markets mispricing inflation data (yes, we all admit to overestimation and underestimation from time to time) when the the headline CPI dropped from 9.1% to 8.7% solely on the back of oil prices dropping after Biden's 1 million barrels a day tap from the Strategic Petroleum Reserves, this decline in inflation should be seen a blip. Food prices and energy prices generally did not come down. But markets are betting that the Federal Reserve's ambiguity on inflation issues that are gripping America (and the world), will trigger a 0.50% rate hike in September rather than 0.75%. The latest stock market inspired reflation greed rally came on the back of the University of Michigan’s Consumer Confidence survey (Chart 1) came in at 55.1% from the July low of 51.5%, om the back of fuel prices being lower:
From Wells Fargo Bank analyst/s on the survey:
“On the surface the University of Michigan's latest survey of consumer sentiment was largely positive, though the details are arguably less encouraging. Overall sentiment rose for the second month in a row and came in just above consensus expectations. To some extent, this modest improvement may say more about relief at the pump amid a trend decline in gas prices than it does about a fundamental change in consumer psyche.”
“In spite of this strength in the labor market and some signs of improvement in inflation, consumer sentiment remains very low by historical standards,” Joanne Hsu, director of the survey, said in a statement. “In the current context, even strong labor markets have been raised as negative news for business conditions, as consumers recognize the challenges businesses may face with hiring.”
Chart 2. Shows S&P 500 with the Powell "Put" (27th July) at 3968, rallying over 12% breaking through its resistance (green line) at 4189 with a support at 4280. This rally is dependent on the correlation with the oil price, say, if it can remain under $95 a barrel, then we may see some support of stocks within its price supports. If oil can fall beneath $90, then extra gains on the S&P 500 cannot be ruled out. However, the market mispricing of a 0.50% rate hike by the Fed in September, with an overstretched reflation/greed rally and a U.S. dollar in sell off mode (pushing up commodities and oil). A dramatic sell off is more likely than not, when fuel prices start to march upward again.
Also note, the 10 Year-Breakeven Rate (2.47%) and WTI ($94) are both showing signs that oil inflation is lurking.
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