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Stocks Drop As Hot Inflation Report Shocks Rates And Dollar Higher

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#Stocks – $ADBE

#Macro – $NDX, #RATES, #DOLLAR, #Spreads  #PPI

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Stocks finished the day lower following a hotter-than-expected PPI report, which sharply increased rates and the dollar, helping widen credit spreads. The 10-year rate rose by ten bps on the day, and that means we are again on watch for a breach of the 4.35% level. This level has held despite multiple attempts since the start of the year. A move beyond 4.35% is needed to intensify the equity market sell-off.

The CDX High Yield index rose 8 points today to just below 330. You can’t really say it has broken out at this point, but it is close. We really need to see it get above 350 before we can start to think about spread widening even more. Right now, it is just too soon. But this is something we need to watch.

The S&P 500’s current earnings yield trades in lockstep with this CDX index, and so if the CDX HY index keeps going higher, then the S&P 500 earnings yield should keep going higher. Essentially, stocks have just been a reflection of the mood for high-yield credit.

What’s odd about the equity market is that despite the big “rally” following the CPI report, the NASDAQ is down two bps points this week. Tomorrow is OPEX, so it will probably be a busy session, but I was surprised to see that all of the gains from the “rally” are gone.

I used “rally” because, as I explained on Tuesday, the “rally” was just an implied volatility crush, and I think that point has now been proven.  I’m just waiting to see if that 17,850 level breaks and the gap from Nvidia’s results finally gets filled.

In the meantime, Adobe won’t help tomorrow, with the shares trading down 10% after hours. The company gave weak quarterly revenue guidance in a range of $5.25 to $5.30 billion, versus estimates of $5.31 billion, which will not cut it in this market. The stock is trading around $510 after hours, and the level around $505 seems pretty important to the shares, with a break of support creating an opportunity for that gap to fill about 13% lower than its after-hours pricing.

Anyway, have a good one.



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