The market recovers: CPI data, optimism and the impact of the upcoming Fed decision

The Consumer Price Index (CPI) report on Wednesday nearly fully met expectations, but this was enough to trigger a strong market recovery led by the “Magnificent Seven” (MAGS). The Nasdaq 100 (QQQ) jumped by 1.85% to a new all-time high, and the overall market breadth was around 6,000 advancing stocks versus 3,600 declining ones. The rest of the market lagged behind QQQ, but there was a clear reversal in sentiment after some negative technical developments in the previous days.

A CPI report in line with expectations usually wouldn’t be a cause for celebration. However, there were growing concerns that inflation might be picking up again, and the economic optimism post-election could have become overly enthusiastic. The data was not too high, and there are still signs of economic strength.

The market has been operating in a “Goldilocks” economic scenario for some time, which has led to valuation problems and technical overextension. However, several days of technical correction led to more cautious positions and created unfavorable trading conditions, which caused a positive reaction to mediocre news.

On Thursday, the Producer Price Index (PPI) report will be released, the last major economic report before the Fed’s interest rate decision next week. It is almost certain that the Fed will cut rates by a quarter-point. But when the entire market expects something, there is a risk of a “sell the news” reaction. Jerome Powell’s comments after the rate decision will be particularly important.

For now, “Goldilocks” is once again leading the way, and that’s all the market needs to keep moving forward.