Stocks Hit Record Highs After Surprise Drop in PPI Fuels Hope for a Rate Cut
Despite the S&P 500 and NASDAQ 100 indices suffering a significant drop on the opening trading day of September, they quickly recovered and even sustained a bullish rally that propelled them to break key resistance levels and reach all-time highs at the end of the week. This comes after PPI (which is widely regarded as a leading inflation indicator) surprised everyone with a significant drop, fueling optimism that inflation will soon cool off in the coming months and may finally compel the Federal Reserve to slash its policy interest rate.
Producer Price Index Data
Source: Bureau of Labor Statistics (BLS) via Sigmanomics
https://sigmanomics.com/US/inflation-rate-mom
On Wednesday, September 10, the Bureau of Labor Statistics (BLS) released the August Producer Price Index, showing a decline of 0.10% from the month prior. The data came as a surprise, as the general consensus was around a positive 0.30% increase in August. In addition, it halted the two-month positive PPI data (June and July). Note that, in contrast to the Consumer Price Index (CPI), which is used to track inflation, the PPI reflects costs at the production stage, before goods and services reach their intended end consumers (such as individuals like us).
Because of this, PPI is widely seen as a leading indicator of inflation, since, essentially, the rising producer costs are usually passed down to consumers in the end. The August PPI showing a surprising decline of 0.10% (especially after a 0.9% increase just a month prior) signals a potential “easing” of cost pressures—including those affected by the sweeping tariffs. This, in turn, could result in lower inflation in the coming months of the year as cost pressures cool off.
Source: Bureau of Labor Statistics (BLS) via Sigmanomics
https://sigmanomics.com/US/inflation-rate-yoy
Moreover, looking at the Year-Over-Year (YoY) increase (as shown in the chart above), this translates to a 2.9% YoY inflation rate, the fastest rate since early this year, and is way above the Fed’s target of 2%. Nonetheless, while this typically causes bearish sentiment in the markets (as higher-than-anticipated inflation usually compels the Fed to step in and consider a rate hike), the PPI data, which showed a dramatic decline, suggests that inflation will most likely cool off in the following months. Hence, Wall Street ultimately remains bullish.
If you want to stay on top of the key market-moving economic events, like the recently announced economic data we covered here, as well as upcoming major economic releases/announcements this year, you can access our reliable and real-time proprietary economic calendar for free at https://www.sigmanomics.com/economic-calendar
Technical Analysis
Source: Sigmanomics.com
Overview:
Close: 6,584 (-0.05%; -3.20)
High: 6,600.21
Low: 6,579.49
Key Support Zone: 6,450 to 6,500
Key Resistance Zone: 6,700 to 6,800
The S&P 500 Index (SPX) has fully recovered from its recent gap down on the first trading day of September, and, in fact, just recently broke the 6,500 level (as shown in the image above). Due to this, the overall sentiment is bullish as market participants expect the index to sustain its upward momentum in the near term. Zooming out, we can also observe an established uptrend as SPX moves within the upward channel.
That said, the index just climbed to the upper 50% region of the channel. Hence, if the rally continues, we expect the channel’s upper boundary to serve as major resistance. Overall, we remain optimistic as the index can still sustain further gains, and a potential trend reversal (worst-case scenario) is extremely unlikely in the near term (until the end of the 3rd Quarter) unless, of course, a sudden bearish catalyst—from a major shift in fiscal or monetary policy—appears.
Market Outlook:
Best-Case Scenario: SPX breaks above its upward channel’s upper boundary (above 6,700).
Base Scenario: SPX moves between 6,450 and 6,700 in the near term.
Worst-Case Scenario: SPX breaks below its upward channel’s lower boundary (below 6,400).
Dave Calutan, MBA
With 10 years of extensive investing and trading experience across Global Financial Markets, including US and International Stocks, Indices, ETFs, Forex, Cryptocurrency, Derivatives (Options & Futures), and Commodities (e.g., Gold & Oil). As a testament to Dave's investment expertise, he has won the National Stock Trading Competition '18.
