In-Line is Good Enough for Today

This morning we received the latest in a never-ending conveyor belt of seemingly make-or-break economic reports when we learned of the July Consumer Price Index data.  Kudos to the economists whose consensus was essentially spot-on.  The month-over-month and year-over-year headline and core numbers were exactly in line at 0.2% for both of the monthly numbers and 3.2% and 4.7% respectively for the yearly headline and core readings.  Cue up the relief rally in equities.

Indeed, stocks sank into yesterday’s close after improving to nearly unchanged in afternoon trading.  That seemed to indicate a real lack of desire for traders to go home long ahead of a much-watched economic report.  Futures were higher heading into the 8:30 EDT release as European markets traded mostly higher. 

The reason for the enthusiasm in Europe was because more Chinese travelers will now find it easier to go shopping abroad for Louis Vuitton handbags.  OK, there was more than a little snark in that sentence, but the logic is sound.  Luxury goods manufacturers, who have heavy weightings Continental stock indices, were bolstered by reports that China would be relaxing restrictions on foreign travel by its citizens.[i]  At the same time, the big M&A news today in the US also revolved around high-end apparel as Tapestry (TPR) agreed to buy Capri Holdings (CPRI) for $57/share, or about $6.7 billion total.

Equity futures continued to trend higher into and beyond the 9:30 open.  As noted above, some of that rally was attributable to relief that the numbers were in-line.  If nothing else, the potential risk from a CPI miss was removed from the market’s mentality, so that was indeed a modest positive.  But the leg of the rally that occurred during the first half-hour of cash trading appeared to be more about trying to outrun a potential rally than buyers with conviction about higher prices.  This is analogous to the type of reflexive trading that we noted as being prevalent through much of July.

Thus, there was little follow-through, and major equity indices had given back much of their early gains by midday.  The “tell” was the bond market.  We have noted ad infinitum that bond traders do a better job of interpreting economic news than their counterparts in the stock market.  2- and 10-year yields fell modestly and fluctuated within a narrow range.  That was a modest relief rally, not an over-enthusiastic leap.  Note the contrast in the chart below:

2-Day Chart, 1-Minute Bars, September Futures.  ES (SPX, red/green bars), ZN (10-Year, blue line)

Source: Interactive Brokers

Fixed income futures are rarely as volatile as equity futures, but the lack of follow-through from in the bond market should still be quite evident. 

There’s nothing inherently wrong with chasing a rally.  But it’s rarely as easy as many people think.  Getting a reality check from a trusted source – in today’s case, the bond market – increases your odds of success.

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[i] This is not as frivolous as I make it sound.  In 2019, my wife and I stayed at the Shilla Hotel in Seoul.  They have an enormous stand-alone duty-free shop on the premises, which my wife described as a weird cross between -Bergdorf Goodman and an Atlantic City casino.  The products were as high-end as those found at the most exclusive department stores.  But there was also a bus lounge where scores of Chinese tourists continually arrived amidst a different set of exhausted, tapped-out tourists who waited for their buses.  The sales at that store had to be enormous, and most of the goods were indeed of the European luxury variety.