The Weekend Edition # 134 - A Second Look at CPI Inflation

Welcome to another issue of the Weekend Edition!

Thank you for reading and subscribing to our newsletter.

Here's what we cover

• Market Recap - Rebounding Market

• Macro - A Second Look at CPI

• Closing Thoughts - We Need a Catalyst

• Calendars

Market Recap - Rebounding Market

May 13 - May 17, 2024

The US equity markets hit an all-time high this week after what’s being perceived as a “good” CPI report and Retail Sales report. While there were encouraging signs in the report, we may not be out of the woods just yet. But that doesn’t necessarily mean that the markets can’t rally. The idea now is that the Fed will get ready to cut rates given softening unemployment data and signs of easing inflation.

Earnings growth has been relatively strong this quarter but, as we’ve pointed out in past issues of the Weekend Edition, earnings still have quite a high bar to cross. Particularly, if we want to see sustainability in this move. We also need the market to broaden out and for that, we definitely need lower rates that will allow other parts of the market to see the kind of earnings growth that is required.

Speaking of earnings we have Nvidia reporting earnings on Wednesday, 22 May after market close.

Commodities

Copper prices saw quite the run this week, particularly after news broke about China introducing measures to help their property market.

Prior to that there’s been the introduction of the new tariffs on China which also affect EVs and EV batteries, as well steel prices.

Finally, with industrial production starting to come back, we’re seeing upward pressure on the entire industrial metal and to a certain extent precious metal complex.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - A Second Look at CPI

Coming back to the CPI, some of the moderation that we saw was expected - Used Cars and Transportation. However, some of the more positive surprises came from Food, and the consensus is that we’re likely to see more positive surprises in energy going forward.

Our concern, however, continues to remain with shelter inflation and we wrote about that in detail earlier this week. (The article is free to read).

But, shelter inflation is not where it ends and the next few months will be critical for the inflation data.

Firstly, we’re coming up on a period of base effects - last year, inflation started falling during May - Jul 2023, so when we compare year-on-year numbers, the comparisons become tougher. You’re seeing the change from lower base.

Secondly, we continue to see commodity prices remain elevated. WTI Crude Oil above $75 usually translates into relatively high energy inflation. We’re also starting to see Natural Gas prices start to pick up.

Thirdly, the Producer Price Index (PPI) came out higher than expected this month. The PPI shows the selling prices received by domestic producers for their output. This number feeds into the PCE inflation numbers (what the Fed keeps an eye on). The PPI also feeds through to the CPI inflation numbers, but it takes a month or two. The new tariffs imposed by President Biden on China could also see goods inflation start to come back.

Finally, we’re also seeing wages continue to remain sticky. While wages have decelerated significantly since the peak, it continues to remain above pre-pandemic levels. This will probably start to ease as we’re seeing softening in the labor market but, it may take a while.

Closing Thoughts - We Need a Catalyst

The market is now pricing in the first cut in September. This is quite plausible given the upside risks to inflation that we’ve just discussed.

Our forecast had been for the first cut to come in July but, given that we’re only starting to see some encouraging signs in inflation and that these upside risks may keep inflation sticky for a while, September may be more appropriate.

The Fed doesn’t need to wait for inflation to hit 2% before they cut and they’ve said as much. Furthermore, we think the PCE inflation prints will be milder than CPI, giving the Fed enough leeway to start with their insurance cuts in September, if not in July.

With the market already pricing in these cuts, we tend to think that equities will likely continue within the current range of around 5300. We need more definite signs of a Fed cut to spark off the next leg higher, or perhaps Nvidia’s earnings on Wednesday could do the trick!

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.