For several weeks the market has been rallying on news and economic data that indicates higher levels of inflation. It ignored a hawkish Fed, it barely reacted to a very hot jobs number, and it rallied on a higher-than-expected consumer price index report.

On Thursday morning it looked like the pattern was going to repeat itself again when producer the price index came in much higher than expected.

But then everything changed — and by the close the major indexes were in the red. 

Before the turn later in the day, the market gapped down on the news and the dip-buyers wasted no time on jumping on the weakness. They were so aggressive that they were able to push the Russell 2000 fund (IWM)  and the Nasdaq 100/Invesco fund (QQQ)  into positive territory briefly.

What has been most remarkable about this action is how equities can rally, even though it is clear that the Fed is becoming more hawkish and there is a growing likelihood of more aggressive rate hikes. Just one month ago, the chances that the Fed would hike rates by 0.5% at the meeting on March 22 was at 5%. At the market close today, the odds were up to 18%. There are also increased chances of additional hikes at subsequent meetings.

The market has been ignoring this issue, and the bulls have had several justifications for it. The foremost is that this is very bullish price action, and there is strong momentum because of a Goldilocks economic scenario.

What changed Thursday was that two non-voting Fed members mentioned the potential of 0.5% hikes in the future. They are the first two to explicitly discuss that possibility, and it finally mattered to the market.

With about an hour to go in the day, a headline hit that James Bullard, president of the Federal Reserve Bank of St. Louis, stated that he had advocated for a half-point hike to get to a restrictive level faster. That news triggered a plunge that took the market below the opening print and to the day’s lows.

When the dust cleared, the S&P 500 was down about 1.5% on breadth, slightly less than three-to-one.

The issue now is whether this sharp intraday reversal will give the bears some momentum. They have been badly beaten up recently as the market has successfully fought the Fed, but with a three-day weekend, option expiry, and a negative seasonality coming up, they may be able to gain some traction.

Have a good evening. I’ll see you tomorrow.


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