Markets Rip, Inflation Reaccelerates, and Banks Quietly Brace for What's Next

We got our answer from last week's post, and we got it fast. Markets pushed higher all week, with major indices closing at fresh all-time highs.

Remember that $683 level I flagged? It held briefly as resistance around $682 gave a small pullback on Monday's gap-down, and then caught a bid before the first support zone. At which point it ripped higher the rest of the week. As stated in last week’s post, “The higher the support level that holds, the better the odds for a move to new all-time highs.” Which proved to be the case, and did so very quickly.

That's three straight weeks of gains over 3% in what is now a truly historic run back to all-time highs.

While this is incredibly constructive for markets, it’s extremely important to understand that when markets do things that have only happened a handful of times in history, that is usually a warning sign for both markets and the economy for what is to come in later months.

For now though, the credit cycle uptrend that began in April 2020 and current bull market in stocks which began October 2022 is still in force.

The rule is simple: if the market keeps rewarding risk, we take it.

But is it truly an all-out risk-on environment as Bitcoin $BTC ( ▼ 0.84% ) continues to lag and hover around it’s recent lows?

Time will tell, but should stock prices and markets continue to move higher while Bitcoin lags then that is a change of character in which you want to be aware. Although it could also serve as a warning sign as well.

Does The Rally to New Highs Mean that the Economy Is Fine and a Recession Is Off the Table?

No. What you're seeing is actually the process for how credit cycles typically end. Especially in year 13 of a secular bull market, when liquidity is abundant and investors are redeploying huge gains back into risk assets. Euphoria at the top is a feature of this phase, not a contradiction of it.

With that being said, stock prices could still move much higher from here defying all belief like they did at the end of the previous Secular Bull Market that ended with the DotCom squeeze and subsequent crash in the late 90s and early 2000s.

Does the Rally Mean Inflation Is Finally Tamed?

No. In fact, the opposite is true. Asset prices rise in inflationary environments, especially when the government throws more fuel on the fire through additional spending and rate cuts. That's exactly what sends prices higher across the board.

This week's PPI confirmed what last week's CPI already showed: we could very well be in the early stages of a new surge in inflation.

Although we once again heard and read some of the same BS headlines about how PPI came in less than expected. That’s one way people allow themselves to be manipulated into believing that “inflation is down” when the opposite is clearly true.

The truth is that it doesn’t matter that inflation rates came in below a bunch of best guesses. What matters is that they continue to trend higher and surged in March.

While Core PPI did not surge as it does not take into account energy or food prices, its is still almost double the 2% target and continues to trend up as well.

Once again, the timing isn't a coincidence. Inflation growth stopped trending down and began trending back up right when the new tariffs were announced and began taking effect last April. That's exactly what I said would happen, from the run-up to inauguration day, through Liberation Day, and basically every week since.

This wasn’t a lucky guess. The overwhelming aggregate information and data on tariffs going back hundreds of years show that tariffs are a tax on imports. That tax gets passed along to consumers in the form of higher prices until it eventually crushes demand which leads to economic contractions while also minimizing options for consumers and creating inefficiencies in the economy which in turn get exploited by the gate keepers. The result of which drives up prices even more as those fees get added to the cost of doing business.

At this stage, disputing that is political posture, not analysis. The people who insisted tariffs wouldn't be inflationary have never offered an alternative explanation for why inflation bottomed and reversed the moment they took effect. What we've gotten instead is pure denial with BS "inflation is down" rhetoric and attempts to manipulate CPI data by using the government shutdown as cover.

Now those same people are going to be wrong again about the price of oil and gas. It is a fantasy that those prices are going to go back to where they were in Jan and Feb before the war with Iran, unless of course demand is shattered by a recession.

The problem now is that oil prices sit upstream of almost everything in the economy: transport, food, manufacturing, plastics, etc. So when crude moves higher, a wave of price hikes follows downstream.

While the US has been more insulated than the rest of the world from the oil shock so far, that could soon be changing. More foreign buyers are now routing tankers to US ports for oil and gas, which increases demand for the US supply and ultimately pushes prices in the US higher.

The only real fix is more domestic drilling and production, and that doesn't happen in a few weeks.

Eventually this catches up to the economy. Unless of course the administration decides to actively fight inflation, prices will keep climbing, and that includes stock prices. The ceiling is whenever enough consumers finally run out of discretionary income or the Fed begins hiking rates.

Until then, we buy stocks. Stocks like oil and gas explorer and producer Devon Energy $DVN ( ▼ 3.39% ) .

At least that’s one way to protect yourself from higher energy prices.

Bank Earnings: "Resilient Today, Cautious Tomorrow"

Big banks ( $JPM ( ▲ 0.11% ) , $BAC ( ▼ 0.87% ) , $WFC ( ▲ 0.2% ) , $GS ( ▲ 2.88% ) , $C ( ▲ 2.2% ) , $MS ( ▲ 0.8% ) ) reported strong profits this past week. The continued market volatility benefited trading desks while investment banking pipelines look better than a year ago as M&A and underwriting activity thaws. A softening of some capital rules was also called out as a positive, giving large banks more flexibility on balance sheet usage and capital returns.

However, top executives are weren’t celebrating.

What the Data Shows:

• Strong Spending: Debit and credit card data showed people are still working and spending as consumer spending grew 6–9% year-over-year.

• The "Gas Signal": According to Wells Fargo, customers are spending 30–40% more on gas and cutting back elsewhere. This is a "reallocation" of funds, which is a warning that high prices are squeezing household budgets.

The headwinds they're flagging:

• Energy prices. Banks are explicitly warning that elevated oil and gasoline prices are already starting to bite, especially for lower-income customers.

  • Keep in mind that oil and gas prices were low the first two months of the quarter before surging the final month.

• Geopolitical risk. Middle East conflict, trade frictions, and supply-chain strain are prompting more cautious planning. JPMorgan has already nudged its full-year profit forecast lower.

• Late-cycle consumer strain. Delinquencies are still low in the aggregate, but credit cards, autos, and pockets of commercial real estate are under closer watch.

Why Banks are Worried: Even though current numbers look good, banks are aggressively increasing their loan-loss reserves (money set aside to cover bad debts). This is classic late-cycle behavior. They see the risks of energy prices, geopolitical conflict, and relatively higher interest rates mounting over the next 12–18 months.

The combination of good current data and more cautious positioning is also classic late‑cycle behavior.

What to Watch with this Week’s Earnings

This week's reports won't deliver a single verdict on the economy, but they are likely to reinforce the same theme: resilient on the surface, more fragile underneath. As more companies report earnings, focus on these three indicators to see if the "resilience" is cracking:

1. Revenue vs. Profit: Are companies making more money because people are buying more (Growth), or simply because they the companies are cutting costs and buying back shares (Late-cycle defense)?

2. The Language of Leadership: Listen for a shift from words like "resilient" to "softening." This is how CEOs telegraph a slowdown before it shows up in the hard data.

3. Credit Health: Watch for rising delinquencies in credit cards and auto loans. This will tell us if the cooling labor market and high energy costs are finally breaking the consumer.

Should you see softer revenues, downbeat guidance, and stepped-up cost cuts across the board, that's the signal that high borrowing costs, slower hiring, and consumer strain are finally curbing demand. Important as the resiliency of the consumer is crucial to continue powering economic growth, which is clearly continuing to slow.

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