There was the typical tug-of-war yesterday, although there wasn’t a lot of conviction among the bulls or bears. But the tide continues to turn. There were more new highs than lows on the New York Exchange (NYSE) and the NASDAQ Composite, and the latter enjoyed a bullish session.

Market Breadth	NYSE	NASDAQ
Advancers	2,152	2,895
Decliners	1,075	1,735
New Highs	38	103
New Lows	18	36
Up Volume	2.89 billion	3.34 billion
Down Volume	1.31 billion	1.79 billion

The S&P saw seven of eleven sectors higher but was anchored by Technology (XLK).

Top performers were an eclectic bunch, but the top three were Consumer Discretionary (XLY) names.

Russell Gets Its Groove Back

The Russell 2000 rallied more than 1.0% and extended its move higher after crashing above the trendline last week. The index closed right at a key resistance point. Clearing this hurdle, the index has a straight shot to 2,139.

Inflation Expectations

Consumer inflation expectations have come down from record levels: 

• 1 -year 6.2% from 6.8%
• 3-year 3.2% from 3.6%
• 5-year 2.3% from 2.8%

Inflation expectations are the same across income demographics.

Expected household income one year from now edged up to tie the record at +3.4.

One year ahead, spending tumbled to 6.9% from 8.4%.

Conclusion

Gasoline prices are probably the main driver of lower inflation expectations, but they are still far too high for the Federal Reserve. Powell & Co. have to be happy to see a sharp drop in spending expectations. You have to give Americans credit – they will spend until the wheels come off or the Fed makes it too difficult. This is very compelling a day before the Consumer Price Index (CPI) report.

Fed’s Path

The Street still sees 75-basis points (bps) in the next rate hike, which would be three in a row and arguably Volcker-like.

The Fed is Almost Done?

But after this hike, the Street sees two 25-bps hikes, then rates in a range but lower by next summer.

Portfolio Approach

Yesterday, we closed a position in Technology in our Hotline Model Portfolio.

Today’s Session

Non-farm productivity in the second quarter declined by 4.6%, as the situation continues to worsen.

Output was sharply lower, compensation is growing slower, and real hourly wages swooned -4.4%.  Meanwhile, unit labor costs surged to 10.8%; the street thought the number would be unchanged from 9.5% a year ago.

Small Business Struggles

“Uncertainty in the small business sector is climbing again with more owners unsure of what’s coming their way. The news is dominated by recession talk. But labor shortages remain challenging…”

Lots of tension ahead of the CPI read in the morning.

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