Then she (Goldilocks) went to the porridge of the Little Wee Bear, and tested it. and that was neither too hot nor too cold, but just right, and she liked it so well that she ate it all up, every bit.
-- "Goldilocks and the Three Bears", from the collection "English Fairytales" retold by Flora Anne Steel (1922)
Considering Inflation
When one sits down and thinks about consumer-level inflation, especially after the April release of the Bureau of Labor Statistics' Consumer Price Index (CPI), I think, even with very little progress of late, there has been a sense of relief that the data has not been even more inflationary than it was.
On Wednesday, currency, equity and debt markets alike reacted to the April numbers as if some kind of major concern had been put to rest. Interesting. Why? The numbers printed very close to consensus view and at least at a casual glance, the Fed would appear to be making very little headway in their fight against this plague of pricing in 2023.
Let's think about this.
One. The Federal Reserve has been aggressive for more than a year, trying to methodically draw down the monetary base, while forcing the Fed Funds Rate from the zero bound up over 5%. The early May policy meeting was the tenth consecutive meeting where the FOMC increased short-term interest rates. The FOMC meets eight times a year.
Two. Central bankers and economists have been keeping a close eye on the probabilities for tightening lending standards due to the recent strains felt throughout the banking system due to the deeply inverted yield curve and (very) poor debt-related asset allocation/risk management at a (supposedly) professional level.
In fact, in the Fed's SLOOS report on Monday, we learned that banks are indeed tightening lending credit conditions. More importantly, we also learned that demand for credit was softening across commercial, industrial and residential markets.
So, maybe an April CPI report that was not as nasty as some had feared, but not really better than consensus, was good enough or "just right" for the moment. Unlike our friend who visited the house of the three bears, just don't get comfortable with it. That's how inflation expectations become unanchored. That's what puts the fire in the belly of those considered to be policy hawks.
April CPI
Headline consumer-level inflation printed at +0.4% on a month-over-month basis and up 4.9% year over year. Though the year-over-year comparison just barely beat expectations for an even 5%, it was good enough for a tenth consecutive month of slowing annualized headline inflation.
At the core, or less food and energy, month-over-month inflation printed at +0.4%, which was slightly hotter than the 0.3% growth I was looking for, but in line with professional opinion. Core CPI on a year-over-year basis also landed on consensus at +5.5%. This was down from 5.6% in March, but year-over-year core inflation printed at 5.6% back in January as well.
Core inflation has been moving sideways all 2023 long. Perhaps, this coming tightening of standards, though due to failure at the regional banking level, can or will work to "our '' advantage. Perhaps the reduced demand for credit across all markets is not as much due to any concerns swirling around the banking space, but just as much if not more, a part of the policy lag effect that we have been talking ourselves blue in the face about for more than half a year now. Perhaps, this is the cake that the Fed has baked. Intentionally.
Food prices were flat from May, but that was somewhat deceptive. Food at home experienced actual deflation at -0.2% m/m while prices for eating out grew 0.4%. Energy prices increased 0.6% m/m. That, too, was deceptive. Gasoline prices were up a full 3% m/m, which is awful, but fuel (heating) oil experienced a month-over-month decrease of 4.5%. Hmm.
Shelter, which is always closely watched, as we know it runs with a serious lag, which makes this an area of focus, hit the tape at monthly growth of 0.4%, which put it in line with the broader report. Shelter on the whole is no longer artificially forcing CPI higher than it would otherwise , and could with its own lag effect, start pressuring CPI in the near-term.
What's It All Mean?
Markets took the CPI data well. They'll get another at bat on Thursday when the BLS publishes their producer-level prices for April. That said, Fed Funds Futures markets are currently pricing in a 92% probability for no rate hike on June 14; the remaining 8% is currently looking for another 25 basis point rate hike.
There is no market for a rate cut for June. However, there is a 34% probability being priced in for a 25 basis point cut on July 26, and that cut is almost fully priced in (73%) for September 20. Jackson Hole.
Late August. What a setup this is going to be. You do not want to be on vacation in late August this year.
Treasuries rallied moderately on Wednesday, but remained within recent ranges. This morning the U.S. 10-Year Note, after a stronger-than-expected auction on Wednesday, pays 3.431% after paying less than 3.42% a couple of hours ago. The yield spread inversion between this product and the U.S. 3-Month Note has narrowed to -179 basis points for the moment. As awful as that seems, that spread was as wide as -190 bps last week.
Equities
It was another lightly traded, yet sloppy session for equity markets on Wednesday. The indexes mostly moved higher -- the Nasdaq Composite by 1.04% and the S&P 500 by 0.45%. Smaller-cap indexes gained ground as well. However, the banks were slapped around again. The transports also gave up some ground.
Seven of the 11 SPDR sector ETFs gained ground on Wednesday. Technology ( XLK) was your leader, up 1.19% as both software and semiconductor names did well. Cyclicals underperformed with Energy ( XLE) found at the bottom of the day's standings yet again, down 1.12%.
While the major indexes showed gains as they have more or less been doing of late, breadth remained negative, which has also been a trend of late. Losers beat winners by almost 3 to 2 at the NYSE and by about 4 to 3 at the Nasdaq on Wednesday. Declining volume easily took a majority share of aggregate trade for names listed at both exchanges as well. All on light trading volume, though that volume did improve slightly for Nasdaq-listed names.
Just an FYI, the Nasdaq Composite has not touched its 50-day trading volume simple moving average (SMA) since last Thursday. The S&P 500 has not touched that threshold since last Wednesday. Not seemingly forever, but certainly worth keeping an eye on.
Just 'Google' It
On Wednesday, Alphabet's ( GOOGL) Google unit held its annual conference for developers. Astute readers will recall that just last month, Alphabet had merged its "DeepMind'' and "Google Brain AI'' research teams in an effort to accelerate the advancement of the company's use of artificial intelligence. The idea it would seem, is to make up some lost ground, at least in the perception of consumers and clients since the launch of the Microsoft ( MSFT) OpenAI ChatGPT half a year ago.
Google announced at its conference, updates to its Bard chatbox, Gmail and Google Docs, which will be powered by Google's large language AI model known as PaLM 2. This product was also launched on Wednesday. Google also states that millions of users will get the chance to use a new version of its search engine that will provide AI-generated summaries to questions asked.
Heading for a breakout? Or rejection?
This is GOOGL's first attempt at breaking out of its volume-driven price channel since early February. A take and hold of this level, could open the door to prices as high as $130. Failure? The 21-day exponential moving average (EMA) has appeared to hold its own for two months now.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 245K, Last 242K.
08:30 - Continuing Claims (Weekly): Last 1.805M.
08:30 - PPI (Apr): Expecting 0.3% m/m, Last -0.5% m/m.
08:30 - Core PPI (Apr): Expecting 0.2% m/m, Last -0.1% m/m.
08:30 - PPI (Apr): Expecting 2.5% y/y, Last 2.7% y/y.
08:30 - Core PPI (Apr): Expecting 3.3% y/y, Last 3.4% y/y.
10:30 - Natural Gas Inventories (Weekly): Last +54B cf.
13:00 - Thirty Year Bond Auction.
The Fed (All Times Eastern)
14:00 - Speaker: Reserve Board Gov. Christopher Waller.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ( NWSA) (0.04)
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