Hot Inflation Data Pushes Markets Toward a Breaking Point as Micron Stumbles

The S&P 500 finished the day lower by more than 1.3% following a hotter-than-expected PPI report, surging oil prices, and a Fed that seems less likely to cut rates in 2026, even if Jay Powell is no longer chair.

The 2-year rate seems to tell the story, rising by more than 10 bps on the day to close at 3.79%, the highest level since August. There is some resistance at 3.8% for the 2-year, but not much, so a run back to 4% seems entirely possible at this point.

What’s really more interesting to me is the 30-year, because it is knocking on the door of 5% again, rising by 4 bps on the day to close at 4.89%. If oil stays at these levels or moves higher, and inflation is indeed heading higher, then a move above 5%—perhaps even back to 5.1% or 5.2%—can’t be ruled out.

Shifting back to the S&P 500, it made its lowest close since November at 6,624 today. The 200-day moving average is a mere 9 points away, and it’s setting up an interesting battleground for the market heading into opex on Friday.

A break of the 200-day moving average, with follow-through to lower levels, would certainly ring alarm bells for many. But for now, a break of the 200-day likely just means a test of the next support level at 6,520. Things don’t get really interesting until we break 6,520. Also, at least through Friday, 6,500 appears to be the put wall.

At least based on my CTA model, I have flows as negative, with the next major flip level around 6,570. I’m still calibrating the longer-term trend level, so I don’t have much confidence in it. But more importantly, systematic flows are not supportive of the market rising.

The XLF Financial ETF is very close to breaking a support level just below $49. After that, $47.25 is the next area of support on the chart, dating back to April of last year and also filling the gap from that time.

But in the end, it’s important to remember that all of this ties back to one thing: oil. And at least for now, that trend remains higher. Until oil breaks, it seems to me that rates and the dollar move higher, while risk assets move lower.

Finally, Micron reported blowout results and blowout guidance, and perhaps more importantly, the stock is still trading down over 3%. Not horrible—at least not yet. More importantly, the stock is trading below $450.

Basically, all of those calls at $450 and higher are going to become worthless very quickly tomorrow if the stock can’t rebound, and could start to get unloaded, which may, in turn, lead to market maker hedges getting unwound.

As long as the stock stays above $430, gamma will—at least based on today’s values—remain positive, so that region may offer support. However, if the stock breaks below $430, dealers will also become sellers, and the stock could very well be on its way to $400…ahh, maybe more like $390.

Yes, the tail really does wag the dog in this market—at least, I think it does.

Mike

Glossary by ChatGPT

200-day moving average: A long-term technical indicator that tracks the average price of an asset over 200 days to identify trend direction.
Basis points (bps): A unit equal to one-hundredth of a percentage point, used to describe changes in interest rates or yields.
CTA (Commodity Trading Advisor): A systematic investment manager that typically uses quantitative models to trade futures and derivatives.
Gamma: A measure of how quickly an option’s delta changes relative to movements in the underlying asset price.
Market maker hedging: Trading activity by dealers to offset risk from options exposure, often influencing short-term price movements.
Opex (Options expiration): The date when options contracts expire, often associated with increased volatility and repositioning.
Put wall: A price level with a high concentration of put options that may act as support due to hedging flows.
PPI (Producer Price Index): An inflation measure tracking changes in prices received by producers, often viewed as a leading indicator.
Resistance level: A price point where selling pressure tends to limit further upward movement.
Support level: A price level where buying interest typically emerges to prevent further declines.

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