- SPY ETF continues to rally as benign CPI reports file more risk.
- Will the Fed agree that bond markets remain calm as volatility drops?
- Fed on summer holidays, so no rate decision until September.
Equity markets continued to rally on Wednesday as a benign CPI report helped further fuel hopes for a dovish Fed pivot and a more sedate 50-basis-point hike at its September meeting. Fed funds futures are now split between the September move with markets pricing in about a 64 basis-point-hike, which is right in the middle. Equity markets though have wanted to rally and shaped the CPI report as benign to meet this desire to rally.
SPY stock news
The CPI report was relatively benign, but everything is relative. The sharp fall in oil prices was always going to help, but there are some worrying signs. For starters, getting bulled up about inflation at 8.5% seems an oddity. Inflation is still spreading into other areas, and next month’s reading will now have lower comparisons. We note already how oil prices are beginning to stabilize.
The market though as we have pointed out since July has been overly short or underweight equities, so this rally was badly needed. Shaping 8.5% inflation as the good news is needed to maintain this rally. Bond markets are also calming, and overall the effects of a summer lull are in effect. MOVE, the measure of bond market volatility, continues to fall, which is usually supportive of higher equity prices.
Bond market volatility, MOVE, daily chart
SPY stock forecast
This SPY rally has now finally taken out our resistance and target at $415. So where to next? $435 is the next target for resistance. With markets so far looking to keep rallying, we expect this bullishness to last some time. The market has rallied despite some hawkish comments from Fed members on Wednesday, so it will take something stronger to turn sentiment around. Earnings season is over, so there is nothing there to worry us. Holding above volume support at $412 to $408 keeps the move on track for more gains.
SPY chart, daily
SPY chart, hourly