Who’s Really in Control: Markets, Inflation or the Fed?

In this IBKR Podcast episode, Scott Bauer and Jeff Praissman break down whether price action is being driven more by macroeconomic forces, central bank decisions or trader positioning – and what that means for what comes next..

Summary – IBKR Podcasts Ep. 395

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi, everyone. This is Jeff Praissman with Interactive Brokers Podcast. It’s my pleasure to welcome to the podcast studio Scott Bauer, Prosper Trading Academy. Hey, Scott. How are you? 

Scott Bauer

Jeff, I am great. How are you? 

Jeff Praissman

I’m good. And love having you come in every other week for our quick market rundowns. And j- you know, for our audience, we go through the past week in the market and then kinda look ahead a little bit as well. Scott, lot of activity, right, in the market. And, you know, what were some of the biggest drivers of the market performance over the past week? And, you know, in general, how did equities react across different sectors? 

Scott Bauer

I mean, we certainly have to, you know, go to Iran, right? Geopolitics and what may be happening at the end of this week, and the market certainly, you know, took that as very positive news. Oil prices, you know, I guess we could probably use the ad- adjective maybe plummeting or maybe that’s a verb. But you know, I think oil, the oil price reaction certainly helped the markets, especially the Dow. And you know, now that earnings season is over, I think that is squarely the focus for the markets right now. 

Jeff Praissman

Yeah, and I imagine there’s kind of like a, you know, flow-through effect if you know, ener- oil becomes low, then helps out the consumers and it may help out some other sectors as well, like retail. 

Scott Bauer

How it’s supposed to work. 

Jeff Praissman

Yep. You know, every time we talk, there’s obviously economic releases like every day at this point. 

So what are some of the key ones that had an effect on the market, you know, last week? And what did, you know, what kind of signal about the health of the economy did they show? 

Scott Bauer

Well, it’s so interesting because, you know, CPI and PPI still show that inflation is absolutely a problem, yet the market kind of shrugged it off. Eco data across the board really continues to be fairly strong. So, you know, I th- I think the market is somewhat grappling with the inflation data, but balanced off by, okay, things are calming down overseas. Things are looking good. Obviously, we have big Fed announcement. But for me, it’s it’s the CPI and PPI last week, and then I know we’re gonna bring this up here momentarily, but next week we get some more inflation data. 

Jeff Praissman

Yeah. I was gonna say you know, obviously the second part of that question is you know, what’s coming up a week, you know, next week, right? What did we just get through and find out and what, you know, what should the traders be paying attention to next week? 

Scott Bauer: So we get FOMC now, but then really, you know, looking to next week, we get PCE. So that is going to be huge. PCE and GDP. Is PCE g- going to show the same thing that CPI and PPI showed? Is it going to just, you know, give us kind of a clear path and we’ll see what the reaction is, especially after Fed announcement that we get later today. 

Jeff Praissman

Gotcha. And, you know, we’re gonna go to your favorite subject, the VIX. We saw volatility pull back, you know, last week. I think it was trading around 16 or so, kind of hovering in that area. So what does that tell us about the investor sentiment and kind of their positioning right now? 

Scott Bauer

Absolutely that the more macro environment people are, I don’t want to say complacent because a VIX at 16 is really not complacent, but they’re, I’d say, more at ease. If we saw the VIX down at, you know, low teens, then we’d talk about complacency. But I think that, you know, both the retail side and institutional side are looking at things and saying that, “You know what? 

There, there still could really be some upside here, but we’re willing to, you know, with a VIX right in that, you know, mid-teen range there, we’re willing to still buy some protection. 

Jeff Praissman

Got it. So kind of hedging the bets a little bit, but y- you know, feeling a little optimistic as well. 

Scott Bauer

Exactly. 

Jeff Praissman

And, you know, finally, what are you know, what are markets currently pricing in for these upcoming events, and where do you think we could see some surprises come out? 

Scott Bauer

There is so much upside call buying in the indices, Jeff, a-as, as you know, that, you know, whether it’s coming from the retail side or institutional side, there is s- so much optimism here. So what could derail this? Obviously, if we get to Friday and the, you know, memo of understanding or agreement that we have, if something falls apart, that could probably hit the markets a little bit. If Warsh and the FOMC kind of say something that, that the market is not expecting, we could see, you know, some problems there as well. But right now I don’t want to say it’s all systems go for the marketplace, but with everything the market has come up against, boy, has it responded resiliently. The one thing I’ve really been focused on is even with the pressure now that the Fed is more than likely going to raise rates, the market is certainly comfortable with the 10-year sitting right around, what, 4.40, 4.42 or so. 

Jeff Praissman

Scott, as always, this has been great for our listeners. You can find more from Scott at prospertrading.com as well as on our website interactivebrokers.com. Click on Education, find past podcasts, webinars, articles everything from, you know, Scott and Prosper Trading Academy. Scott, once again, thank you for swinging by the studio and looking forward to our next chat. 

Scott Bauer

Me too. Thanks so much, Jeff.