Nasdaq Defies Higher Yields Ahead of CPI

US yields are rising ahead of crucial inflation data that could define whether the Fed will go for one more rate hike this year and whether or not stocks can avoid taking a hit.

Are Tech Stocks Providing Immunity to the Markets?

On Monday, US Treasury yields rose ahead of the release of key inflation data on Wednesday. But, despite the higher borrowing costs, the Nasdaq jumped 1.1% on the back of better performance from tech stocks. Tech stocks were moving on better company data, not in response to the general economic situation. However, some of the overall market optimism can be chalked up to expectations that the Fed won't hike in September. Investors are pricing in a 93% chance that the Fed will keep rates steady at the next meeting, focusing on the one after that when there is a 43% chance of a hike. That is seen as the last hike of the cycle.

Economists predict that inflation will rise for the second time in a row, growing to 3.4% from 3.2%, above the 3.0% latest bottom in June. The rising fuel costs, with gasoline prices hitting a 10-year seasonal high, plus base effects, are pushing the headline level. But the Fed is likely to pay more attention to the core number, expected to drop to 4.4% from 4.7% prior. That is based on an expectation that the monthly core rate will stay steady at 0.2%, and a tick up in that measure could see investors reevaluating the amount of pressure the Fed could be under to take more action on core inflation, which is still more than double the target rate.

Core Inflation Has Been Slowing Slowly

Last month's all-important core inflation rate reached its lowest level in nearly two years, but some Fed trackers are worried about the slow pace of its descent. Some Fed officials still want to err on raising rates, arguing that they can be cut later, but some analysts point to a shifting in the stance of FOMC members. The balance of risks has shifted to be more even, and there is increased concern that raising rates could provoke a downturn after a series of disappointing data points. In particular, the labour market (typically a lagging indicator) has grown increasingly weak since the start of the rate hiking campaign.

Powell insisted in his pivotal Jackson Hole speech that the Fed has become "data dependent". Since then, data has largely been in line with the expectation of a pause in September and an unlikely possibility of a hike in November. It would take a deviation from expectations in the CPI data to change that outlook, but with a market seen as rather nervous, the Nasdaq could be among the indices with the strongest reaction. The AI boom supports the tech-heavy index but could be more vulnerable to higher borrowing costs as businesses face headwinds to invest in new technologies.

Nasdaq could be in a triangle correction and remain so if it trades below 15930 in the short term. If bullish price action fails to extend past 15630, with subsequent drops falling short of 14550, the pattern will have more chances to ensue. However, a peak above the regional top but still under the year’s top could inspire a wedge pattern, pending only one pullback near the 15k handle before an optimal breakout higher.

Source: US TECH 100

Key Takeaways

Despite rising US yields ahead of crucial inflation data, the Nasdaq jumped 1.1% thanks to better performance from tech stocks. Investors are optimistic that the Fed won't hike rates in September, with a higher chance in the following meeting. Economists predict a rise in inflation, but the Fed is more likely to focus on core, which is expected to drop. Some Fed officials are concerned about the slow pace of core inflation's descent and the potential impact of raising rates. The Nasdaq could be particularly sensitive to any deviation from expectations in the CPI data.