Wednesday's Market Minute: A Crisis of Good Data?

By now, we all know the situation. The labor market is strong, inflation’s still hot, and the Fed’s nowhere near backing down. Treasury yields and the dollar are moving perfectly in sync higher, and the stock market is going in the opposite direction. 

For investors, nothing matters more than the two inflation prints coming out the next two days: PPI today and CPI Thursday. The month-over-month rate is expected to inch higher for both. Take out food and energy, and the annual rate is also expected to climb. And here’s the thing – economists have been underestimating data lately. The Citi Economic Surprise Index, which tracks the degree to which data are beating expectations, is positive and climbing since the summer. Assuming the trend holds, we’re more likely to see warm figures than cool ones. 

If that happens, we may see the highest VIX reading since the pandemic first began. The volatility index has been on the rise since August, holding above 30 this month as stocks slip to new year-to-date lows. Yet so far, the selling has been a slow, steady drip. VIX hasn’t been over 40 since 2020. If the 10-year yield breaks back out above its high of 4% and the U.S. dollar goes along with it, the next leg of selling would likely be the most intense yet. 

So far, this bear market could be best described as a fairly standard valuation compression of expensive stocks. It’s far from the first time the Fed has killed a bull market. What’s truly unique about today is how hard government bonds are falling alongside stocks. We’re breaking all kinds of records in bond markets and their relationship with stocks.

VIX doesn’t really trade above 40 outside of crises. If this week’s inflation data are the straw to break this weary camel’s back, we may have the first crisis of a too-strong economy ever, and the risk of panic in bonds could bring unprecedented outcomes. If the numbers come in light, VIX should be fast to retreat back down to the 20s, as it has repeatedly throughout the year.

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