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This Morning

Nasty reaction to a nasty CPI report

Recent history has been repeating itself, which hasn't been a bad thing for the stock market.

The peak inflation narrative had been resuscitated along with the peak hawkishness narrative. The S&P 500 found support at 3,900. The notion that there will be a soft landing had been in active discussion. And global fund manager cash levels were at their highest level again since 2001, according to Reuters, which cited the latest BofA Global Fund Manager Survey.

Entering today, the Dow, Nasdaq, and S&P 500 had surged 4.3%, 6.9%, and 5.8% from their lows last Tuesday. They had been on a hot streak alright, blazing a trail with the help of short-covering activity, some weakening in the dollar, and presumably some performance chasing.

That hot streak promises to cool off at today's open, however, primarily because consumer inflation continues to run hot. In fact, it was hotter than expected in August and put a chill on some of the peak inflation/peak hawkishness/soft landing chatter.

Specifically, total CPI increased 0.1% month-over-month in August ( consensus -0.1%) and core CPI, which excludes food and energy, rose 0.6% month-over-month ( consensus 0.3%). That left the year-over-year increases at 8.3% for total CPI (versus 8.5% in July) and 6.3% for core CPI (versus 5.9% in July).

The key takeaway from the report is the acceleration in the year-over-year rate for core CPI, which was pushed in part by increases in the indexes for shelter, medical care, and new vehicles. That has provided a disheartening data point for market participants -- and the Fed -- that suggests the rate hike at the September 20-21 FOMC meeting will be 75 basis points and that one cannot be assured that there won't be another aggressive rate hike after that.

The food index was up 11.4% year-over-year. That is the largest 12-month increase since the period ending May 1979. The energy index was improved, up "only" 23.8% year-over-year, versus 32.9% in July. Take food, energy, and shelter out of the CPI mix, and you still see an index that is up 6.4% year-over-year.

The worrisome perception of rate-hike matters hit home immediately in the Treasury market, equity futures market, and currency market.

The 2-yr note yield, which is most sensitive to changes in the fed funds rate, shot up to 3.72% from 3.50% and the 10-yr note yield jumped to 3.43% from 3.30%. The S&P 500 futures, which had been up 31 points in front of the release, are now down 93 points and are trading 2.6% below fair value.

The Nasdaq 100 futures are down 365 points and are trading 3.4% below fair value. The Dow Jones Industrial Average futures are down 569 points and are trading 2.0% below fair value.

The U.S. Dollar Index was down 0.5% at 107.82 before the CPI report. It is now up 0.7% to 109.05.

It has been a nasty reaction for anyone caught on the other side of those trades. In general, though, the August CPI report was just a nasty report at this stage of the game

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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