Most women know that men have an answer for everything. That doesn't mean the answer is right, but there is an answer. Alas, we are back in action today providing some answers for why the stock market came barreling back from a knee-jerk sell-off in the futures market following a hotter than expected CPI report that pushed the yield on the 10-yr note to its highest level since January 2014.
Question: Why did the futures market collapse like it did? Answer: Because it was a programmatic reaction following an "If this, then that" command.
Question: Why did the CPI report not spook the stock market? Answer: A closer examination made it apparent that the year-over-year trend in total CPI and core CPI is consistent with what has been seen in prior months and there was an acceptance of the idea that a pickup in inflation is a reflection of a growing economy, which is good for earnings growth..
Question: Why did the stock market rally so decisively off the lows? Answer: The resilience in the face of rising interest rates took many by surprise, which forced a confluence of short-covering, buy-the-dip, and fear-of-missing-out trading activity.
Question: Why did the Treasury market do so poorly? Answer: Because the Treasury market sees the firming of the inflation trend as a springboard to higher inflation down the road given the tightening labor market, the weak dollar, and fiscal stimulus, which in turn could mean the Fed might have to be more vigilant with its tightening action.
Question: What happened to all of last week's concerns about rising inflation, rising rates, soaring volatility, and falling stock prices? Answer: They are in a hibernation stage, but they are not dead.
And so we shift to today when there is little question that the stock market is going to start on a decidedly positive note.
The S&P futures are up 15 points and are trading 0.6% above fair value. The Nasdaq 100 futures are up 36 points and the Dow Jones Industrial Average futures are up 194 points.
Why? Because yesterday's trading action -- and the rebound over the last four sessions, which has seen the S&P 500 retrace 50% of the loses it registered from its January 26 high and February 9 low -- has market participants "bulled up" again.
Beyond that sentiment, there is also some appreciation for the latest batch of earnings reports, which included some healthy capital return plans from the likes of Cisco (CSCO), Applied Materials (AMAT), Reliance Steel (RS),and Waste Management (WM).
This morning's economic data, meanwhile, fit the script of a growth-oriented economy.
- The Producer Price Index for final demand increased 0.4% in January, as expected, and is up 2.7% year-over-year. The index for final demand, less food and energy, also increased 0.4% (Briefing.com consensus +0.2%) and is up 2.2% year-over-year.
- The key takeaway from the report is that producer prices are rising, which will feed the Treasury market's concerns about a pass through to consumers.
- Initial claims for the week ending February 10 increased 7,000 to 230,000 (Briefing.com consensus 227,000). Continuing claims for the week ending February 3 increased 15,000 to 1.942 million.
- The key takeaway from the report is that the low level of initial claims is a reflection of a tight labor market and a period of increased demand when employers are reluctant to cut staff.
- The Philadelphia Fed Index increased from 22.2 in January to 25.8 in February (Briefing.com consensus 22.0), driven by a pickup in new orders and prices paid.
- The key takeaway from the report is that manufacturing activity in the Philadelphia Fed region has accelerated
- The Empire State Manufacturing Survey fell from 17.7 in January to 13.1 in February (Briefing.com consensus 19.0) despite a pickup in the indexes for new orders and prices paid
- Manufacturing activity in the New York Fed region is still in expansion mode, but the key takeaway is that the prices paid index is at its highest level in nearly six years
The Industrial Production report for January (Briefing.com consensus +0.2%) will be released at 9:15 a.m. ET and will be followed by the NAHB Housing Market Index (Briefing.com consensus 73.0) at 10:00 a.m. ET.
Treasury yields have continued to drift higher in the wake of today's data. The 2-yr note yield is up to 2.19% while the 10-yr note yield has increased to 2.92%.
The futures market, though, strengthened in the wake of the data, demonstrating how the stock market has flipped the script on rising interest rates back to the January narrative. In other words, they are being embraced as a reflection of a growing economy and a byproduct of a rotation out of bonds and into stocks.
That answer seems to be working for now, but the question from this man is: will it suffice when the 10-yr yield carries a 3-handle or if the opening rally is greeted with renewed selling interest?