Inflation Disappoints Again

SPX reached both of our downside targets yesterday, closing slightly below our 2440.81 target at 2438.17. It was a nice 50+ point gain from our short at 2490.10 on Tuesday [12:18 Update], and came reasonably close to Wednesday’s forecast.The slight overshoot did little damage to our rising red channel. Bulls are no doubt more concerned about inflation, which disappointed again in July. CPI came in at 1.7% (1.8% expected) and core remained at 1.7% (in line.)

As we expected, energy prices were key, turning in a 3.4% YoY increase.

Needless to say, traders are more skeptical than ever that the Fed will find reason to hike any time soon. The USD is sliding again — except against the yen, of course. The plunge in USDJPY lasted just long enough to facilitate a tag of the red .886 Fib.Between that bounce and VIX’s reversal at the white channel top, futures are up over 10 points from their overnight lows. In other words, our expectation of a bounce appears to have been correct. The trick will be in maintaining it.The USD might not be much help to stocks — though we do have two Fed speakers on tap to explain why a rate hike is still a great idea.

Instead, oil and VIX will likely drive whatever bounce we get, with CL having tagged our 48.10-48.16 target range overnight.It’s a tough assignment, with headline risk still weighing heavily on real people and algos. As we discussed yesterday, if the rising red channel doesn’t hold, it could be a long way down.