Santoli’s Wednesday market notes: Hot inflation report nudges the market toward recovery plays

Published Wed, May 12 20211:07 PM EDTUpdated Wed, May 12 20211:28 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Not a shocking inflation print, but still an unwelcome one. It drives a steady, grinding market decline rather than a flash sell-off (yet). To a large degree the hot but somewhat flukey CPI report just pushed the market in the same direction it's been traveling for a month: Collective exit from growth, preference for reflation plays/cyclicals in the context of a general refusal by investors fully committed to equities to be overly impressed by good news. The S & P 500 tried this morning to make yesterday's low mean something, didn't work… Still within the post-election rally tracks but the lower end takes us another 2% to 3% lower, also around February highs. Tech is getting pretty oversold but not the broader market yet. The Nasdaq 100 – packed with secular-growth, disinflationary cashflow machines – is just about back to parity with the S & P 500 over the past year. If the NDX "needs" to test its 200-day average, that level is 4% to 5% down from here and right at the index's March low. It would leave open the chance for a pretty impressive test/possible double bottom. I say the 0.9% month-on-month CPI gain wasn't a shock because some forecasts were trending that way, the market action for weeks has been privileging inflation beneficiaries and the number is both high enough and driven by certain extreme component moves (used cars, etc.) that it's not a number the market will quickly extrapolate. As noted yesterday, this could well be transitory as the Fed assumes and insists. But one month's data can't conclusively affirm or refute that claim. The tricky part for investors is that markets inherently anticipate and try to discount the future. The Fed has said emphatically that it will not anticipate the meeting of its goals before moving on policy, but will wait and wait and wait for the data to say, "we're here." So inflationary flare-ups can wear and tear on valuations in some areas without it having monetary-policy implications. Still a cyclical rotation, made messy by downside momentum in expensive/disruptive tech and some cyclicals already having had a great run. Financials flat today, energy up, but materials, industrials pressured in line with the broad S & P. All occurring shortly after the one-year anniversary of a major low when cycle patterns suggest "it's time" for some choppy payback as growth indicators for manufacturing, retail spending and corporate profits pass their peak. As noted, this is not a panic move, so if a high-energy flush is needed this probably isn't it. But it's not always needed to punctuate a 3% to 4% pullback from a record high in S & P. Bond market response to CPI is for an orderly uptick in yields, nothing crazy, with gains concentrated in the 3- to 5-year maturities, suggesting more hikes in that zone than previously assumed but not much before. Corporate credit is chill – junk spreads steady. Market breadth weak but not profoundly so, 75/25 to the downside. Volatility has a genuine bid today, VIX above 25, and also above the May VIX futures (a sign of more stress but also sometimes a sign a sell-off might soon climax), VIX downtrend in danger of being reversed, but not yet. Still below Jan/Feb/March peaks.

Traders on the New York Stock Exchange.

Source: NYSEa

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.