CPI Eve: Why Stocks Are Drifting and Oil Is Not

Tuesday was the kind of session where the market couldn't decide what it wanted to be. The Dow fell 183 points, the S&P 500 dropped 24 points, and the Nasdaq slid 159 points as investors collectively decided to sit on their hands the night before the July Consumer Price Index report. Classic CPI-eve energy: everyone has an opinion, nobody wants to be wrong, so nothing moves much except oil, which does whatever it wants.

US crude climbed back above $83 per barrel (Brent topped $88) as the Strait of Hormuz situation refused to resolve itself politely. Iran insists the strait stays shut until the US meets its conditions, including reparations and an end to the naval blockade. Pakistan's defense minister said a deal is close. Iran said it is not. That contradiction is basically the entire Hormuz situation in miniature, and energy markets are pricing in the Iran version, not the Pakistan version.

The macro backdrop layering on top of this is not exactly soothing. Bloomberg Surveillance noted that inflation has now stayed above the Fed's 2% target for over 63 months, and with the 10-year Treasury sitting around 5%, there is a credible argument that financial conditions simply are not tight enough. State Street's Marvin Low pointed to record corporate debt issuance from big tech and robust equity markets as evidence the Fed still has work to do. If July CPI prints hot, Wednesday morning is going to feel very different from Tuesday afternoon.

The bright spots are real but narrow. Goldman's Tony Pasquarello highlighted that S&P 500 earnings growth is running at 32% including tech and 28.3% ex-tech, with net income margins revised up to 15.6% and sales growth more than 300 basis points above expectations. Ten out of eleven sectors are posting profit growth. The underlying economy is not broken. What is broken is the geopolitical overlay that keeps energy prices elevated and inflation stubborn just when the Fed wants to declare victory.

Meanwhile, US existing home sales dropped nearly 2% month-over-month in July to a three-month low, and the median home price hit $434,000, a record. Affordability is the word that keeps coming up in every context, from housing to politics to the midterm electorate that both parties are desperately trying to read.

The market is not broken. It is just waiting for Wednesday morning to tell it which way to run.