CPI came in hot today and the market initially reacted negatively before stalling out. PPI inflation data tomorrow will give another confirmation that inflation is ramping back up or it will come in lower and then we will see what the market does. 

Something helpful to remember with all this inflation stuff. Inflation ramping up is NOT what hurts financial markets (look at BTC and commodities). The Fed’s reaction to that inflation is what impacts markets.

If the Fed is saying “we know inflation is ramping, but we don’t care” then markets can continue to ramp on the “inflation is running hot” narrative. If the Fed says “no rate cuts this year” or “we can’t rule out another rate hike if inflation ramps up more” then we can get into risk off mode and markets get scared. 

Bond yields (TNX) are rising fast which is hurting two main areas. IWM and KRE. Small caps (IWM) and regional banks (KRE) do not like rising rates or bond yields. Why? Because most small companies aren’t actually making money so they don’t have an earnings return. So would a fund manager rather hold small caps earning 0 or a bond yielding 5% or large cash flowing companies earning 10%? Definitely not small caps. It also makes borrowing more expensive for small caps and those companies need to borrow more than large companies. 

And for KRE the regional banks, rising bond yields hurts them because they hold tons of bonds on their balance sheet, and when bond yields spike, that means bond values are dropping. And in a business where these small banks are highly leveraged and their balance sheet gets messed up because the value of the bonds they hold gets sliced, they are at higher risk of blowing up like SVB or FRC. 

Hopefully that makes sense.