Good and Bad
The macro seems fairly clear. At least it did on Thursday. Just one day after the April Consumer Price Index data reflected consumer prices that at least had printed close to consensus and had continued to slowly decelerate at the headline level, the April Producer Price Index (producer-level prices) hit the tape. Disinflation is far more evident at this level of economic activity.
While on a month-over-month level the headline and core PPI both printed at +0.2%, which felt rather benign, the numbers were even more encouraging on a year-over-year level. Over the past 12 months, headline PPI growth printed at 2.3%, which was down from 2.7% in March and below the consensus view of 2.4%. Like headline CPI, headline PPI now has printed in a state of deceleration for 10 consecutive months. Core PPI hit the tape at a one-year growth rate of 3.2%, also below expectations (for 3.3%) and down from March (3.4%). Core PPI, while not putting together a consecutive months' streak of deceleration like we see in the headline print, has been in visible deceleration since early 2022.
At the same time that the above mentioned numbers crossed the tape, the Department of Labor announced that for the week ended May 6 264,000 individuals had filed for state unemployment benefits. This print was up 22,000 from the week prior and the worst single week in terms of numbers of individuals finding themselves newly unemployed since October 2021. This increase pushed the four-week moving average for initial jobless claims, which is how many economists view this data point, up to 245,250, the highest level this moving average has reached since November 2021. Continuing jobless claims, which run one week behind initial claims, inched higher to 1.81 million and have been running 35% to 40% higher than year-ago levels for several months now.
The takeaway? It seems clear. Producer prices can be a leading indicator of consumer prices. Job losses are undoubtedly accelerating.
Are prices low enough? No. Are job losses damaging economic activity to a great enough degree for this Fed? Probably not yet. Both of these key ingredients, however, are moving in the direction the Federal Reserve Bank has directed them toward.
Does this mean the Fed pivots? Not yet. Pauses? Probably, but that's just my opinion. Fed funds futures show an 86% probability for such a pause on June 14, a percentage that is down from more than 92% just about 24 hours ago. A 14% probability for another 25-basis-point rate hike still exists. Of course, there are still potential knuckleballs out there that could impact everything....
Default, Anyone?
On Thursday, yields for most series of US Treasury debt securities traded lower than where they had traded on Wednesday. Not US 30-day (one-month) paper, though. The yield for the shortest-dated part of that curve has tacked on more than 100 basis points in a week's time and held its ground there in an attempt to price in the potential for a federal hiccup. We do not see this behavior in the market for US 90-day paper (three months), so markets are also pricing the likelihood that such a hiccup would be so painful that a resolution would then come quickly.
Speaking from Japan early Thursday morning, Treasury Secretary Janet Yellen was asked if there was a chance President Biden might use the 14th Amendment to the US Constitution as a means to "go around" the debt ceiling if default appeared imminent. The 14th Amendment states that US debt authorized by law "shall not be questioned." Yellen answered: "What I would say, it's legally questionable whether or not that's a viable strategy." In other words, the president needs legislative approval and the legislature needs executive approval to get this done.
On that note, the meeting that was to be held here on Friday between President Biden and House Speaker Kevin McCarthy was put on hold until next week. At first, my knee-jerk reaction was along the lines of, "What is wrong with these people?" However, it appears that talks among subordinates of both leaders are actually yielding progress (according to unidentified sources). The decision to delay may be more in order to allow these "staff level" talks to continue and then meet when perhaps something concrete might develop. This is one reason why equity index futures are trading higher overnight.
Perhaps they watched JPMorgan Chase (JPM) CEO Jamie Dimon on Bloomberg TV on Thursday. Dimon bluntly said that if a debt ceiling agreement is not reached and a federal default is realized, results could be "potentially catastrophic."
Markets
A week or two ago, would you have believed me if I told you that the Nasdaq Composite had closed higher for four days in the past five, that the S&P 500 had closed higher for three sessions in the past five, and that the Dow Jones Industrial Average had closed lower for four consecutive sessions and for eight sessions of the past nine? If you looked at breadth you might have. Breadth has been weak nearly every single day this month.
Blame Thursday on Walt Disney (DIS) as the entertainment giant gave up 8.73% in response to its fiscal second-quarter results that were posted on Wednesday evening. That said, the KBW Bank Index was the only equity index among those I follow most closely to move more than 1%. The KBW gave up 1.26% on Thursday in response to news that PacWest Bancorp (PACW) had disclosed in a filing that it had lost 9.5% of its total deposits last week alone. This pressured regional banks on a broad level.
Eight of the 11 S&P sector SPDR ETFs closed out Thursday in the red as Materials (XLB) , the Utilities (XLU) , the REITs (XLRE) and Energy (XLE) all lost anywhere from close to 1% to well more than 1%. Communication Services (XLC) led performance, gaining a full 1% for the day.
As mentioned above, breadth has remained weak. Losers beat winners at the New York Stock Exchange by more than 2 to 1 and at the Nasdaq by about 5 to 3. Advancing volume took a 47% share of composite Nasdaq-listed trade and a mere 30% of that same metric for NYSE listings. Trading volume continued to dwindle for both groups.
We Have Been Waiting
On Thursday evening, billionaire Elon Musk tweeted, "Excited to announce that I've hired a new CEO for X/Twitter. She will be starting in (about) 6 weeks!" Musk added that he will move toward being the social media company's executive chair and chief technology officer. He did not name his replacement as chief executive, but it is believed to be NBCUniversal head of advertising Linda Yaccarino.
Musk, who is also CEO of Tesla (TSLA) while running SpaceX, too, had told us since acquiring Twitter last October that his hands-on management of that company was temporary. The announcement created an overnight rally in shares of Tesla, in which I participated. I am now long the name for what is likely a short-term trade.
Didn't Make the News
Earlier this week, Air Force General Glen D. VanHerck testified before the Senate Armed Services Subcommittee on Strategic Forces regarding the fiscal 2024 defense authorization request and Future Years Defense Program. VanHerck said, "Hypersonic weapons are extremely difficult to detect and counter given the weapons' speed and maneuverability, low flight paths and unpredictable trajectories." VanHerck added, "I believe the greatest risk for the United States stems from our inability to change at the pace required by the changing strategic environment." In explanation, he also said, "In an area of incredible innovation and technological achievement, inflexible, outdated processes are a greater impediment to success than many of our competitors' advancements."
US Navy Vice Admiral Jon A. Hill also testified, indicating that the Defense Department has integrated tracking capabilities between space, ground and sea-based radars, and said flatly, "That capability is here today." Hill directs the Missile Defense Agency. The MDA and US Space Force are co-developing the ability to track hypersonic weapons from space and have initiated the Aegis Glide Phase Interceptor program that uses the proven Aegis system to provide the depth of fire necessary for terminal defenses.
Lead contractors for the Glide Phase Interceptor program are currently Raytheon Technologies (RTX) and Northrop Grumman (NOC) .
Economics (All Times Eastern)
08:30 - Import Prices (Apr): Expecting 0.3% m/m, Last -0.6% m/m.
08:30 - Export Prices (Apr): Expecting 0.3% m/m, Last -0.3% m/m.
10:00 - U of M Consumer Sentiment (May-adv): Expectating 63, Last 63.5.
10:00 - U of M Inflation Expectations (May-adv): Expectating 4.6%, Last 4.6%.
10:00 - U of M 5 Year Inflation Expectations (May-adv): Expectating 3.0%, Last 3.0%.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 748.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 588.
The Fed (All Times Eastern)
19:45 - Speaker: Reserve Board Gov. Philip Jefferson.
19:45 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SPB) (-.14)
