The stock market has now given back the bulk of its 18% rally from the mid-June lows. The catalyst for the move higher from mid-June was the possibility of inflation numbers rolling over which would be the harbinger of the Fed slowing down on its rate hikes and the unwind of extreme readings in short interest and bearish sentiment. A contributing factor was the resilience of corporate earnings and economic data despite some adverse conditions.
However, these conditions are going to get even more difficult after the latest inflation data which will likely push rates higher and for a longer period of time. The Fed wants to see inflation decline in a meaningful and sequential manner before it considers relaxing its current hawkish stance. There was some inkling that this could be happening based on July’s data and continued weakness in gasoline prices, freight rates, and vehicle prices in August.
