The Morning Call---Inflation conundrums

 

The Morning Call

 

7/21/26

 

The Market

         

    Technical

 

            Monday in the charts.

            https://www.zerohedge.com/markets/big-tech-bitcoin-bounce-gamma-unclenches-bonds-black-gold-both-sold

 

Summary: Amid a quiet macro week, investors are bracing for the micro (mega-cap earnings) and after OpEx unclenched Gamma, markets were freer to move today (Nasdaq higher, rest lower). Bitcoin bounced alongside big-tech and bond yields jumped despite oil prices well off their highs chopping around unch, (fuel products higher). The dollar and gold went nowhere. The loss of positive dealer gamma after July options expiration leaves the S&P 500 less pinned, according to Bloomberg macro strategist, Michael Ball, giving any momentum rally greater scope to pull the broader market higher.Weakness in semiconductors and other crowded AI-infrastructure winners has pushed high-beta momentum into one of its fastest and deepest drawdowns on record. But the size of the recent drawdown in past AI-winners and more negative positioning does indicate there is a risk of a squeeze higher, which was the case on Friday. Broader market positioning matters more now.

 

            Monday in the technical stats.

            https://www.barchart.com/stocks/momentum

            https://www.barchart.com/stocks/market-performance

            https://www.barchart.com/stocks/sectors/rankings

            https://www.barchart.com/stocks/signals/new-recommendations

 

            Margin debt jumps (again) in June.

            https://www.advisorperspectives.com/dshort/updates/2026/07/20/margin-debt-finra-june-2026

 

            The dollar signals a continuation of its bearish chart pattern.

            https://talkmarkets.com/article/markets-at-crossroads-waiting-for-the-next-breakoutbreakdown-1784566715

 

            The VIX isn’t telling the whole story.

            https://www.zerohedge.com/the-market-ear/calm-storm-vix-isnt-telling-whole-story

 

Summary: The VIX still looks remarkably calm. Beneath the surface, however, the picture is very different. Single-stock volatility has exploded, semiconductors are swinging wildly, dealer gamma has deteriorated and investors are increasingly paying for downside protection. Goldman's volatility panic index has surged in recent sessions. Unlike the VIX, it captures a broader set of volatility signals, offering a deeper read on market stress.

 

What happens after a 20% drawdown in the semis?

https://www.zerohedge.com/the-market-ear/what-normally-happens-after-20-drawdown-semis

 

Summary: 15 episodes of >20% drawdowns in SOX over the past 15 years. 5 turned into >30%. Worst 44%. What happens after a 20% drawdown? 20 days later = 8% positive return. On average.

 

Tuesday morning setup: US stock futures are higher led by Tech after a strong bounce in chip stocks in Japan (memory stock Kioxia traded limit up after trading limit down on Friday and Monday was a holiday) and Korea, as evidence mounts that Momentum / Semis pullback have bottomed, with supportive price action elsewhere in Asia and Europe, though the JPM EU Trading Desk is not yet seeing follow-through buying in Semis.  As of 7:20am ET, S&P futures are 0.5% higher, lagging the 1.4% bounce in Nasdaq futures helped by a report that TSMC is planning price hikes, although it is unclear if the early ramp will persist amid the re-escalating war with Iran which overnight saw Houthis impose a blockade on Saudi Arabia. In premarket trading, most Mag 7 names are higher with semis leading (SOXX +4%). Cyclicals ex-Energy are leading Defensives with both Staples and HC net lower and AI boosting Industrials and Utils. WTI crude is trading near its highs, boosting Energy as all 3 commodity complexes move higher with silver the standout which has traded in tandem with the AI theme. The yield curve is twisting steeper with yields ranging from -1bp to +1bp with USD flat. Today’s macro focus is on the weekly ADP number and regional Fed activity.  US economic data calendar includes ADP weekly employment change (8:15am) and July Philadelphia Fed non-manufacturing index (8:30 am). Fed speaker slate is blank during July 18-30 external communications blackout period around the July 28-29 FOMC meeting.

 

    Fundamental

 

       Headlines

 

              The Economy

 

                        US

 

                        International

 

The May UK unemployment rate was 4.9% versus consensus of 5.0%; May average earnings were up 4.3% versus +4.5%.

 

The July EU economic sentiment index came in at 23.4 versus predictions of 11.2; the July German economic sentiment index was 26.3 versus 18.0; the July German current conditions index was -77.1 versus -77.8.

 

                        Other

 

                          Crude oil versus refined product prices.

                          https://econbrowser.com/archives/2026/07/eyes-on-refined-product-prices

 

This analyst believes oil prices will remain elevated through the end of 2027.

https://talkmarkets.com/article/interview-with-christiane-baumeister-oil-price-shocks-1784561347

 

                          The manufacturing sector of the economy continues to improve.

                          https://bonddad.blogspot.com/2026/07/the-manufacturing-sector-of-economy.html

 

            Overnight News

 

President Trump is nearing a decisive fork in the Iran war, with U.S. and Israeli officials envisioning only two viable endgames: Option 1: Pursue a new 10-day ceasefire aimed at reopening the Strait of Hormuz. Option 2: Launch a massive joint military campaign with Israel to force Tehran's capitulation.

 

OpenAI and Anthropic executives are sounding the alarm about the rise of cheap AI, particularly powerful new models produced in China, suggesting they will lead to a “dystopian” AI future and present unacceptable security risks without regulation.

 

The cost of protecting Oracle Corp.’s debt against default reached a fresh multi-year high on Monday while its existing bonds sold off, as doubts grew over whether the company’s massive investments in artificial intelligence will pay off.

 

            Iran

 

              Overnight news.

              https://www.zerohedge.com/geopolitical/us-iran-fighting-enters-10th-day-tanker-hit-hormuz-houthis-threaten-red-sea-chokepoint

 

            Inflation

 

              Gold is the constant.  What it signals is in substantial decline.

              https://www.forbes.com/sites/johntamny/2026/07/19/gold-is-the-constant-what-is-the-signal-in-its-substantial-decline/

 

Confusion over how the Fed/Warsh is measuring inflation. Lost in this somewhat esoteric struggle to define inflation is the fact that however the Fed has defined inflation, they have never met the goal anyway.  I am a whole lot less concerned about defining inflation than I am about the Fed having the balls to manage monetary policy to meet the whatever its definition is.

https://stayathomemacro.substack.com/p/2-of-what

 

              What the yield curve is telling us about inflation.

  https://wolfstreet.com/2026/07/19/30-year-treasury-yield-still-5-06-30-year-tips-yield-highest-since-2010-reintroduction-yield-curve-prepped-for-rate-hike-this-year/

 

              Inflation conundrums.

              https://www.advisorperspectives.com/commentaries/2026/07/20/conundrums-inflation

           

              A statistical revamp is about to lower inflation.

              https://www.wsj.com/economy/central-banking/pce-inflation-data-updates-ca7bfd61?st=HtLu99&reflink=desktopwebshare_permalink

 

            Tariffs

 

              Trump slams Canada with 50% tariff on selected goods.

              https://www.zerohedge.com/political/trump-reaches-1930-tariff-law-hit-canada-50-duties-not-these-items

 

            The Financial System

 

            They are doing it again.

            (4) Oh My Fucking God, They're Doing It Again

 

     Investing

 

            Why retail traders consistently underperform.

                https://www.advisorperspectives.com/commentaries/2026/07/20/why-retail-traders-underperform

 

    News on Stocks in Our Portfolios

 

 

What I am reading today

 

            A look at the future of warfare.

            https://www.zerohedge.com/technology/watch-aerial-drones-ferry-kamikaze-ground-bots-battle-warfare-automation-accelerates

 

 

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.

 

 

 

Monday Morning Chartology

 

The Morning Call

 

7/20/26

 

 

The Market

         

    Technical

 

As you can see, the S&P has been building what technicians call an ascending triangle---which historically results in an upward breakout.  However, Friday’s pin action brings that scenario into question as the index fell (1) below the lower boundary of that triangle but also (2) below its 50 DMA.  That doesn’t necessarily mean that the jig is up---as you can also see, earlier the S&P had a one day drop below both the lower ascending boundary and its 50 DMA and quickly recovered.  Arguing for such a recovery is (1) the index remains above both its 100 and 200 DMAs and (2) it is in uptrends across all timeframes. 

 

Right now, follow through is what matters.

 

                       

 

 

 

 

Friday’s pin action aside, the long bond has had a pretty dismal last couple of weeks.  I would have thought that there would be more churn given the upbeat inflation numbers, the subsequent hawkish Fed speak and then the resumption of the Middle East war.  That said, given the somewhat confusing news flow, I continue to think the long bond is going nowhere.  What we know technically is that TLT is below all three DMAs and in downtrends across all timeframes; so for the long bond to rise enough to even challenge the upper boundary of its very short term uptrend, I think that it is going to take a series of positive developments.  I await such with my heart all atwitter.

 

 

 

 

 

 

GLD remains in a well-defined downtrend.  It is below all three DMAs; and is now challenging the lower boundary of its short term uptrend (if it closes below it today, it will reset to a trading range).  Like TLT, I was a bit surprised that it didn’t experience more churn give the conflicting headlines.  With that said, the chart clearly suggests that more downside is in the cards.

 

 

 

 

 

The dollar continues to develop a very well defined very short term uptrend but on a longer term basis is wandering in the wilderness, i.e., it has a long way to go to get out of its short term trading range. At the moment, the only thing that I can see that will reset that to an uptrend is if Warsh is the real deal---and we don’t know that yet.

 

 

 

 

 

Friday in the charts.

https://www.zerohedge.com/markets/kimi-kuwait-korean-chaos-cap-ugly-week-tech-oil-jumps-most-start-war

 

Summary:  A busy week of macro (inflation inflected lower, growth steady), was dominated by various headline catalysts impacting market narratives: Peace-premium (endless escalation culminating with Iran attacking Kuwaiti water and power plants in counterstrikes against the US), AI Spendaholics (China's 'low cost to build' Kimi from Moonshot crushes the 'expensive' American dream), & Semis to the Moon (Korean retail wakes up to the downside of leverage). By the end of the week, stocks were down led by Nasdaq (Semis/Momo ugly), bonds were bid (rate-hike odds tumbled) despite oil's biggest week since war started. The dollar and gold were weaker, bitcoin managed to end unch. This week's market action was fundamentally anchored by a sharp macro regime shift triggered with surprisingly cooler than expected inflation prints, derailing near-term Fed rate hike expectations and fueling broad USD weakness across G10 currencies. he inflation surprise forced an immediate repricing of duration risk, transitioning markets inflation-anxiety induced higher yields (and a yield curve steepening - as growth optimism picked up in the soft survey data)...

 

As the following chart shows, while crude has been rising recently, product prices are soaring back near recent highs (and bond yields are following products, not crude)...

                        An ugly week for US stocks with Nasdaq clubbed like a baby seal (as Small Caps and The Dow outperformed... but were still red on the week)...

 

                        Equal-weight S&P 500 closed at a record high Thursday even as the Nasdaq 100 fell 1.75%, with 10 of 11 sectors positive at one point intraday. This is rotation, not broader defensive liquidation...for now.

 

Friday in the technical stats.

https://www.barchart.com/stocks/momentum

https://www.barchart.com/stocks/market-performance

https://www.barchart.com/stocks/sectors/rankings

https://www.barchart.com/stocks/signals/new-recommendations

 

Traders stunned by momentum meltdown.

https://www.zerohedge.com/geopolitical/traders-stunned-momentum-meltdown-earnings-quality-problem-simmers-under-surface

 

Signs of panic.

https://www.zerohedge.com/markets/signs-panic-goldman-derivs-guru-warns-ai-credit-blowout-spilling-over-entire-market

 

Summary: One week ago we were delighted to see that none other than Goldman's top derivatives trader, Brian Garrett, echoed what we had been warning for nearly a year, namely that the real risk to AI stocks was not within the stock market at all, but rather with bonds, where spreads had been aggressively ramping wider in recent weeks as the market's concerns about return on hyperscaler investment once again spilled over into credit land......in the process crushing semiconductor/memory stocks, amid fears the relentless capex tsunami would hit a brick wall and spark a market crash as hyperscaler capex has firmly cemented itself as the primary source of the global credit impulse. One week ago we were delighted to see that none other than Goldman's top derivatives trader, Brian Garrett, echoed what we had been warning for nearly a year, namely that the real risk to AI stocks was not within the stock market at all, but rather with bonds, where spreads had been aggressively ramping wider in recent weeks as the market's concerns about return on hyperscaler investment once again spilled over into credit land...

..

Monday morning setup: US equity futures rebound from Friday's selling, indicating a firmer start to the week with S&P futures rising 0.5% at 8.00am ET, and Nasdaq futures up 1% after a sluggish start to the session, after Iran’s Foreign Ministry said it had received proposals from mediators about the conflict with the US. In premarket trading, semis are higher as are Mag7 names; the AI theme is bid across sectors. Cyclicals are leading Defensives; both are higher in absolute terms, pointing to an ‘Everything Rally’ today. According to JPM, the US / Iran escalation is being faded with WTI lower pre-market and Brent off its highs. Bond yields are flat to up 1bp s the yield curve twists steeper. Commodities are mixed but net higher with US crude/natgas lower. The update from Iran has seen energy prices reverse gains with Brent now down 0.3% and on an $87/bbl handle. European stocks are now a touch higher with the Stoxx 600 up 0.1% Asian stocks were more mixed as a 4.5% plunge in the Kospi was offset by advances in China after two major state funds showed fresh purchases of domestic stocks. Bonds are still down but off session lows with Treasuries off by 3 ticks and yields up around 1bps across the US curve. The Bloomberg Dollar Spot Index has been choppy but ultimately flat with the greenback mixed versus G10 peers. Spot gold is up 0.1%, while silver rises 1.5%. Bitcoin has been on the back foot, down 0.5%. This week is a light macro data with the next Fed mtg on July 29, today we receive the Leading Index. 

 

 

 

    Fundamental

 

       Headlines

 

              The Economy

 

The US stats the week of July 6^th were scarce but balanced with no primary indicators and one negative inflation reading.  Last week was also a bit slow though the data was upbeat with one positive, one neutral and one negative primary indicator and two great price measures.

 

Overseas, the week of July 6^th the numbers were also balanced but included two neutral and one negative inflation datapoint.  Last week, they were also balanced with one positive and one neutral price indicator.

 

There is nothing in this data to alter my view of steadily growing economy. It is the inflation front that garnered all the attention with both CPI and PPI coming in better than anticipated.  On the surface that would seem just peachy; but a debate arose over whether a less positive PPI (than CPI) was a sign that future CPI readings would disappoint.  While I tend to agree with those that argue that it is, I prefer to ‘wait and see’.  Although the renewed fighting in the Middle East (and the accompanying rise in oil price) may make any disagreement moot. 

https://giftarticle.ft.com/giftarticle/actions/redeem/b65ae535-c36d-478c-a65f-44474814b0c1

 

Of course, those inflation numbers did lower the odds of a rate increase at the July FOMC meeting---which is a plus for the equity market---and our ruling class I suppose (making financing the enormous Federal debt a tad cheaper)---but that won’t solve the greater macroeconomic problem of irresponsible fiscal policy.

 

So for the moment, my ‘inflation is as good as its going to get though it may not get any worse’ position remains.

 

Regarding the end of the war---it didn’t.  And as you might guess from my prior comments, it shouldn’t.  With the clear caveat that I am no political/military strategy expert, I don’t know how Trump could possibly go into the midterms having spent billions and killed American kids with Iran charging tolls to pass through the Strait of Hormuz and vowing to continue to develop a nuclear weapon.

 

Finally, last week witnessed a hitch in the AI ‘gitty up’ with (1) questions arising about who’s zoomin’ who between the chip makers and hyperscalers and (2) the news Friday that China’s AI technology may well have caught up to the US.  I don’t think that the end is clear in either case.  But they both raise the question about the continuing level of AI spend and its impact on free cash flow and earnings.

 

Bottom line: the economy continues to grow and inflation remains well above the Fed’s target even if it is not getting any worse.  However, this scenario is not without some storm clouds, specifically, renewed conflict in the Middle East and rising uncertainty regarding the course and the winners in the development of AI technology.

 

                        US

 

                          From last Friday.

 

                          June industrial production was up 0.1% versus estimates of +0.2%.

                          https://www.advisorperspectives.com/dshort/updates/2026/07/17/industrial-production-recession-indicator-june-2026

 

The July consumer sentiment index came in at 54.4 versus projections of 51.0.   

https://www.advisorperspectives.com/dshort/updates/2026/07/17/consumer-sentiment-hits-highest-level-since-february-on-easing-gas-prices

 

                        International

 

                          May EU construction output was up 1.2% versus consensus of +0.5%.

 

                          June German PPI fell 0.3% versus expectations of -0.2%.

 

                        Other

 

                          Update on Q2 GDP nowcast.

                              https://www.capitalspectator.com/us-q2-gdp-growth-expected-near-q1s-increase/

 

                          The fallacy of the ‘K’ shaped economy narrative.

                          https://www.realclearmarkets.com/articles/2026/07/17/k-shaped_economies_signal_soaring_abundance_for_all_1194994.html

 

                          Inside the recent retail sales number.

  https://wolfstreet.com/2026/07/16/americans-splurge-online-and-at-vehicle-dealers-instead-of-buying-homes-yolo-retail-sales-without-gas-stations-jump-for-5th-month/

                                               

                                                   Housing starts and permits continue to show a sector in equilibrium.

                          https://bonddad.blogspot.com/2026/07/housing-permits-and-starts-continue-to.html

                       

 

                        Iran

 

              Overnight news.

              https://www.zerohedge.com/geopolitical/iran-says-two-tankers-exploded-hormuz-chokepoint-ship-traffic-near-standstill

 

                                                 

                        Inflation

 

              Fed comments raise stakes for inflation data.

              https://www.advisorperspectives.com/commentaries/2026/07/17/fed-comments-raise-stakes-inflation-data

 

            Tariffs

 

              Has Trump finally admitted that tariffs aren’t working?

              https://thehill.com/opinion/finance/5970190-section-232-tariff-reversal/

 

            AI

 

              The datacenter revolt goes national.

              https://www.zerohedge.com/ai/data-center-revolt-goes-national-tea-party-veteran-leads-142-rallies-across-42-states

 

     Investing

 

 

                        Hyperscalers drag down bond gauges across the globe.

https://www.bloomberg.com/news/articles/2026-07-17/hyperscalers-are-dragging-down-bond-gauges-across-global-markets?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTc4NDMwMjg1MCwiZXhwIjoxNzg0OTA3NjUwLCJhcnRpY2xlSWQiOiJUSTVYSFBLSVVQU0IwMCIsImJjb25uZWN0SWQiOiJCMzFCNTRDQTI3MTE0NjAxOUQxMURCN0IxRUM4NTE2MyJ9.CmxARYKVRCVHtrjj2AqAGJBl8dSzKDZZP1AS8jjz8HQ

 

 

    News on Stocks in Our Portfolios

 

 

What I am reading today

 

 

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