Key Takeaways:

• 10-year yield jumps seven basis points to near 1.7%
• Major indices fall 2%
• Eyes on Thursday’s producer price index (PPI) report

An ugly week got even uglier today amid new inflation concerns, but tomorrow could be even more interesting as markets approach a key technical support level and more inflation data loom.

There were plenty of inflation fears in the market before today, but the government’s April consumer prices report provided more proof that it’s actually out there. Most of the selling reflected new concerns that a rising price environment could force the Fed’s hand and start to weigh on company margins.

Before getting deeper into the forces behind today’s selling, let’s note that first of all this was an incredibly orderly sell-off with no signs of panic at all. You could even make the argument that some of it was natural trading in the market after the new highs posted late last week. Sometimes that can trigger some profit taking.

Also, although the Nasdaq-100 Index (NDX) has been pretty ugly this week and overall advancers were hard to find, the S&P 500 Index (SPX) showed pockets of green today, especially in a few sectors. Financials held up most of the day and sold off at the close. Health Care
SBRA
(IXV) held up most of the session, too, and so did Energy (IXE). So you could say there are pockets of hope.

In addition, we’re not done with inflation data yet. Tomorrow morning brings April producer prices, which analysts expect to rise 0.3%, according to research firm Briefing.com. Now it could come in high, like CPI, but today’s CPI-triggered sell-off may provide a bit of a shield, and maybe there won’t be as adverse a reaction in the market. We’ll have to wait and see.

A Check of the Technicals

The other thing to take home tonight is that despite the steep selloff, the SPX wasn’t able to take out its 50-day moving average, now near 4050. It’s not a lot to grab on to after a day like this, but the fact that the SPX fell to nearly that point and then closed slightly above the session low may be something that provides a little technical help tomorrow.

That 4050 level now becomes even more important to keep an eye on, because the question is will buyers turn up on another test? The 50-day moving average got tested twice in March and held up both times.

The news from the NDX wasn’t so hot technically. It’s now well below its 50-day moving average of 13,374, closing Wednesday near 13,000. There’s a long dive from there to the 200-day moving average down under 12,500.

One more thing: Don’t necessarily take your eyes off of earnings, which continue to roll in. Disney
DIS
(DIS) is tomorrow, and this afternoon saw a strong showing from dating site Bumble (BMBL). You could argue that dating is one area that might be picking up as we come out of quarantine.

Easy Money, But For How Long?

For most of this year, two factors have helped drive stocks higher: Easy Fed policy and powerful economic growth unaccompanied by signs of overheating.

Both those narratives took a blow over the last week, first with Friday’s mediocre jobs report and then with Wednesday’s spike in April consumer prices. The April consumer price index (CPI) rose 0.8%, vs. Wall Street’s benign expectation for 0.2%. The year-over-year growth was 4.2%, the highest in more than 12 years.

The jobs data appeared to show the economy not growing as fast as some had thought, while today’s inflation data—along with a number of companies talking on earnings calls about price pressure—suggest that the growth that is happening is driving up prices so quickly the Fed might have to act sooner than it planned to.

That’s far from certain, obviously, but investors will probably monitor any Fed speech, especially from Fed Chair Jerome Powell, for hints that they might be ready to “think about thinking about” tapering their monetary support.

Putting It into Perspective

Of course, it’s important to take a step back and look at the bigger picture. A couple of data points don’t make a trend in and of themselves. Just a month ago we were sitting here looking at March jobs growth at a massive 916,000 (an estimate that’s since been lowered) and pretty tepid consumer price growth. A month from now, for all we know, those same metrics could return.

That’s why as an investor, it’s important not to overreact and go crazy over any one report. The market is down two days in a row, so take a breath and see what happens.

And as we’ve been saying, no one should be surprised to see consumer prices up 4.2% year-over-year considering the different economy we were in last month compared with April 2020. Back then you couldn’t even go to a restaurant or car dealer. In that regard it’s not really a fair comparison.

In fact, we might not have a really solid picture of inflation until much later this year or even 2022, when we can hopefully start comparing apples to apples as the economy emerges from Covid. That’s why it frankly would be surprising to see Powell and company change their tone anytime soon after so many months of talking about “transitory inflation.” Though it’s dangerous to predict anything, it seems likely they’ll want to see a few more data points before even hinting at any policy change.

That kind of thinking is probably what kept expectations of any rate hikes muted even after the CPI number today. CME Group (CME) Fed funds futures show less than a 9% chance of a rate hike before end of year, just up slightly from earlier this week.

Many on Wall Street, however, tend to pile into new trades when there’s news and don’t leave a forwarding address. That was evident in the bond market today as the 10-year Treasury yield flirted with 1.7% for the first time since late March and sectors like Technology (IXT), Communication Services ($IXC), and especially Consumer Discretionary (IXY) took it on the chin. These are sectors some analysts think could be most vulnerable if inflation turns out to actually be a long-term trend. Financials and Staples—some of which might benefit from higher rates and rising prices—still didn’t see much of a bid, while Energy was the only sector to rise Wednesday.

Still, when you add it all up, the SPX remains just 4% below recent all-time highs. Basically, today’s selling took us back to where we were on April 5 in the SPX. To put things in more perspective, consider the fact that we made a new 52-week high just five days ago. The SPX is up 8.2% year-to-date, which isn’t too shabby, though Tech stocks continue to struggle and are barely up overall in 2021.

It’s certainly not pretty that we sold off, but it’s not panic time, either.

TD Ameritrade® commentary for educational purposes only. Member SIPC.