Reaccelerating inflation fears grip markets

On Wednesday, US stocks slipped as investors continued their position-squaring ritual ahead of a much-awaited US CPI inflation report.

The stock market had an excellent beginning to the year's first half but encountered difficulties in August. With gasoline and oil prices soaring this month, traders gradually became anxious about the possibility of inflation reaccelerating, which might interrupt the US's disinflationary process before core inflation can be squashed. And this has caused many to worry about the potential for a more hawkish- for- longer central bank monetary policy that will negatively impact the market.

Indeed with West Texas Intermediate ( WTI) rising to its highest level since November last year, inflation expectations and concerns are rising tangentially. Given the recent sizzling gains in WTI, it's worth considering that inflation could jump over the next few months, especially with gasoline prices rising even faster. Too early, perhaps, to make much inroads in today's data, but it will be a significant complication as we advance if gasoline prices stay elevated. I honestly can't see how investors look the other way here, as they will be constantly reminded every time they drive by a gas station.

A report later on Thursday will offer a big clue on whether broader core inflation concerns are warranted. But ahead of the Dog Days of Summer, markets desperately need a much friendlier risk backdrop, which a softer-than-expected US CPI print could catalyze.

At a minimum, CPI must show that the previous month's drop was not a one-time event; otherwise, more Fed action might be needed to tame the inflation dragon.

While longer-duration stocks like Tech and Communication Services and Consumer Discretionary are weighed on the Index overnight, interestingly, 10-year US Treasuries are holding steady at ~4%, suggesting that the bond market, at least, is taking a more sanguine view. So with steady bond markets and stocks lower, it hints that investors continue to reduce equity positions from a high level of optimism to a more neutral setting, thinking an upside core CPI print could rock the boat given elevated position settings.

While some of the downswings this month could be attributed to the seasonally slimmer trading volumes that usually occur as we head deeper into summer, this week's move, however, has the hallmark of tactical reasons, as concerns rise about the US consumer, growth and inflation ahead of today's US CPI print.