To The Moon

The July consumer-price index to be released on Wednesday may determine whether the recent rally for stocks and crypto can be sustained, as traders look for any signs of slowing inflation.

The market is expecting at least some cooling in inflation. Economists polled by The Wall Street Journal forecast that the headline consumer-price index in July to fall from a four-decade high of 9.1% to 8.7% year over year, while the core CPI number will increase from 5.9% to 6.1%.

Should the headline CPI match expectations, or fall below them, "the most likely case is we would have a slight rally," Jay Hatfield, chief executive at Infrastructure Capital Management, said in an interview. "It would definitely be good for risk."

Still, the market might trade off "regardless" of the CPI, Hatfield said. He thinks expectations for the Fed to become more dovish about its pace of rate hikes may be too optimistic. Seasonality also plays a role, as the stock market tends to trade off in late August, September and early October, Hatfield noted.

Meanwhile, a stubbornly hot core CPI reading could mean "a little bit of a weaker market environment," according to Kevin Gordon, senior investment research manager at Charles Schwab. Even though Fed officials have "made it clear that they're looking at multiple metrics, clearly core is the main focus for them," Gordon said.

The July job report, released Friday, also was in line with forecasts for stickier core CPI, Gordon noted. The U.S. added 528,000 new jobs in July, way above Wall Street estimates, and the unemployment rate also fell to prepandemic levels. Economists polled by The Wall Street Journal had forecast 258,000 new jobs.

"If you look at the overall nominal strength in terms of payrolls and hours worked and average hourly earnings, it was still really strong in nominal terms. So that is generally consistent with higher prices and particularly higher core prices," Gordon said.

Martha Reyes, head of research at crypto exchange Bequant, echoed the point. "You can maybe get a bit better number than you did previously, but the fact of the matter is inflation is not going down quickly," Reyes said. "Oil prices coming down helps but then prices of the refinery gate are not coming down as quickly, because there are constraints. We also have owners' equivalent rent, which also has a huge lag," Reyes said.

Despite a broad based market rally in July, bitcoin, the world's largest cryptocurrency is still was down 50% on the year through Tuesday, according to CoinDesk data. The S&P 500 index booked its fourth straight day of declines Tuesday, putting it 13.5% lower on the year so far.

The recent rally in stock and crypto markets were mostly led by "technical and very heavy short positioning," according to Reyes. "We'll have to wait and see potentially another leg down," Reyes said.