Late at night, after three hours of continuous gains, the cheers suddenly stopped

Source: Wall Street Intelligence Circle

Last night, the market chose to trust the data first; in the coming days, it still has to answer another question: will it once again put its faith in oil prices?

The financial markets welcomed another round of cheers:

- U.S. stocks rose across the board. The Dow Jones Index gained 0.02%, the S&P 500 Index up 0.38%, and the Nasdaq Index up 0.9%;

- Gold prices rebounded, once hitting $4,100 intraday, but eventually closed at the $4,050 level;

- The U.S. Dollar Index plummeted sharply during the session, but regained nearly half of its losses before the close;

- Oil prices continued to rise, with U.S. crude climbing to the edge of $80;

- U.S. Treasury bonds rebounded, with the 10-year yield falling below 4.60%, closing at 4.58%.

First, the market has once again shown the classic "dollar down, everything rises" pattern. Clearly, the market is trading on "declining rate hike expectations"—the probability of a rate hike in July has dropped to 16%. The dollar has fallen below the 101 level, and the 10-year U.S. Treasury yield below 4.60%. The alert has been downgraded to a warning—because both indicators are still some distance from confirming a trend reversal.

Second, the June U.S. CPI data has been released—comprehensively below market expectations, with even core inflation unexpectedly lower than predicted—making this the most satisfying inflation data in recent months. Yet the market’s reaction was not as enthusiastic. The gains in U.S. stocks did not match the data; the Dow Jones barely rose, and the Nasdaq was up less than 1%.

There’s another detail worth noting—gold surged and pulled back, spiking to $4,100 before closing back at $4,050. After the CPI was released, gold prices rallied for three consecutive hours, then started to fall. The market is not blindly optimistic. On one hand, the worsening situation in the Middle East has made the June data somewhat less useful as a reference; on the other hand, Federal Reserve Chair Walsh’s speech last night hardly conveyed a “dovish” tone, and the market is still pricing in nearly a 60% chance of a rate hike in September.

Many media outlets are prone to misinterpretation, saying: “CPI cools, the Fed is reassured.”

But that’s not the case. Walsh emphasized again today: Inflation is a choice (inflation is not a natural disaster, but a policy choice).

Third, the biggest change on Tuesday is not the rise or fall of one particular asset, but that the market has returned to “data-driven pricing,” with data once again becoming the market’s “primary explanatory variable.”

In the next few days, three variables will need to be closely monitored:

Can oil prices truly remain above $80, and will energy risks continue to feed into inflation?

Will the 10-year U.S. Treasury yield return to above 4.6%, confirming whether the bond market has changed its stance?

Will the U.S. Dollar Index end its correction and strengthen again?

If all three rise in tandem, then the optimism brought by the CPI may be just a brief respite; if their movements are mixed, then the market may have the opportunity to continue along the main line of “cooling inflation and a rebound in risk appetite.”

Last night was not the end, but a new choice of direction.