You've made it. CPI Day.
Wall Street looks for 7.3% at the headline. 5.9% at the core. That's hot. Really hot.
They say that Thursday's child has far to go, but then again they say that Wednesday's child is full of woe. So much for that.
Demand was the word on Wednesday. Demand for reserve currency sovereign debt securities, to include Treasuries, demand for global equities, to include, broadly and especially domestic markets. A rush to get long everything and anything ahead of that inflation print. Markets were so green, it felt like somebody knew something. That said, if "they" knew something, why would Treasuries and equity index futures soften overnight?
I think maybe you better button down the back of your jersey, and tape on some foil. This may not be your average Thursday.
The Setup
Atlanta Fed Pres. Raphael Bostic is one of the more media savvy officials at our central bank. He has been quoted and "sort of" misquoted, or at least been taken out of context at times. He is measured and very careful when he speaks as a result.
Bostic appeared on CNBC television on Wednesday morning. On inflation, he said, "I am very hopeful we are going to see that decline. There is some evidence of that." Bostic added, "If we are going to see a return to numbers closer to our target (2% y/y) we need to see those month-over-month changes start to decline, what we have seen is not getting worse on a month-to-month level, and I am hopeful that will translate into a slow decline as we move through the spring and into summer."
Bostic is correct. Over the past three months, the year-over-year CPI print has gone from 6.2% to 6.8% to 7.0%, with 7.3% expected for today (January). Over that same time frame, the month-over-month print has gone from 0.9% to 0.7% to 0.6%, with 0.5% expected this morning. Not only does admittedly red-hot month-over-month inflation appear (fingers crossed) to be slowing, but forward comps will almost certainly change the narrative around the year-over-year performance. That number hit the tape at 1.4% a year ago, for January 2021. Then for February 2021, CPI popped slightly to 1.7%. Still soft. After that, in 2021, it was off to the races. March printed at 2.6%, April at 4.2%, and beyond, it's all 5% plus.
Do you realize how hot month-over-month inflation would have to be for the year-over-year headline print to stay in the 6% 's or higher? Not gonna happen.
On that note, futures markets trading in Chicago are pricing in a 100% chance at an overnight rate hike on March 16, with a 23% probability that this hike would be for 50 basis points. In fact, futures are fully pricing in at least a 25 basis point hike not just in March, but also in May, June and July, which would be four consecutive FOMC policy meetings. On top of that, these markets are currently pricing in a 52% likelihood of a fifth rate hike in September and a roughly 50/50 shot at a sixth rate hike for 2021 at the December meeting. Of course, I would put the likelihood of six rate hikes at a much lower probability than that. That's just my opinion, but I think the Fed has trouble hitting four hikes in a midterm election year unless economic activity absolutely surges.
The Cleveland Guardian
There was another Fed official who spoke publicly on Wednesday. Long-time Sarge fave Lorretta Mester, President of the Cleveland Fed, who is a voting member of the FOMC, and is probably considered to be the second most hawkish member of that committee this year, spoke on interest rates and balance sheet management.
On rates, Mester said, "I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015." I took that as Mester being open to, but not necessarily in favor of, a 50 basis point opening move in March.
On the balance sheet, Mester is speaking my language. Mester said, "While our principles state that we will reduce balance sheet assets primarily by adjusting the reinvestment amounts of the principal payments we receive on our assets, I would support selling some of our mortgage-backed securities at some point during the reduction period to speed the conversion of our portfolio's composition to primarily Treasuries."
As readers well know, the one spot where I have been highly critical of the Federal Reserve's quantitative easing program was that the central bank continued to add to its holdings of mortgage-backed securities long after it was quite obvious that the pandemic had not negatively impacted this market. I had called for an immediate cessation of that side of the balance sheet expansion program as far back as January 2021 and repeated that call several times, my plea apparently falling on deaf ears in Washington.
At least we know that Loretta Mester, as far as that market is concerned, "gets it." She is thinking outside of the box, which is good. This could also serve as a more covert way to tighten monetary conditions than to walk right up to the economy and punch it in the nose.
New Kid on The Block
The Federal Reserve Bank of Boston has finally selected a successor to former Boston Fed head Eric Rosengren, who abruptly retired last September. The Bank has chosen Susan M. Collins, who is acquainted with the Federal Reserve system, having already served on the Federal Reserve Bank of Chicago's board, and having served as a moderator at the Kansas City Fed's Jackson Hole shindig in the past.
Collins is MIT and Harvard educated, has taught at Harvard and Georgetown, and is currently serving as University of Michigan Provost. Collins will not replace interim Boston Pres. Kenneth Montgomery until July 1, and because Boston is a voting member of the FOMC this year, she will not vote on policy until July 27. This means that Philadelphia Fed Pres. Patrick Harker, who is an alternate member of the FOMC in 2022, will continue to vote in Boston's place for the next three meetings.
Wednesday Marketplace
Equity markets roared. The thirst for risk was broad. From an index-based perspective, the Nasdaq 100 and the Nasdaq Composite booked gains of 2.1% and 2.08%, respectively. These two siblings both retook their 21-day exponential moving averages...
...while the Nasdaq 100 even closed above its 200-day simple moving average (SMA). Right now, futures markets are saying that this "take" won't hold, but that really is up to the Bureau of Labor Statistics this morning.
Beyond that, the Dow Transports soared 1.93% primarily led by the airlines. The S&P 500 ran 1.45%, as all 11 S&P sector-select SPDR ETFs closed in the green. Four sectors gained at least 2% for the session, led by Communication Services ( ( XLC) ), while two others gained more than 1%. Defensive sectors took the bottom two slots and three of the bottom four on the daily performance table.
Away from large-caps, the S&P Midcap 400 picked up a 1.84% gain on Wednesday, more or less performing in line with small-caps as the Russell 2000 gained 1.86%, but the S&P 600 increased a "mere" 1.12%.
As for breadth, winners beat losers at the NYSE by greater than a 5 to 2 margin and at the Nasdaq by slightly less than a 5 to 2 margin. Advancing volume took an overwhelming 80.1% of composite NYSE trading volume, and an absolutely incredible 86.2% of composite Nasdaq trading volume. Aggregate trading volume increased on Wednesday from Tuesday for NYSE listings, Nasdaq listings, S&P 500 subordinates, and Nasdaq Composite subordinates.
Wednesday was about as pure and broad a session of professional accumulation as these markets will ever have.
More Than Equities
The U.S. Treasury Department raffled off $37B worth of 10-Year paper on Wednesday afternoon. The level of demand, foreign demand to be exact, was stunning. Like I told you, it was as if somebody knew something.
Bid to cover landed at 2.68, the highest level for this series since May. The high yield award of 1.904% traded through not only where secondary markets were trading at the time, but well outside of the day's range. In other words, "investors" paid more for newly issued 10-Year notes than they really had to.
As for the composition of the issuance takedown... Indirect bidders purchased 77.6% of this entire auction. That's a new record. For those new to debt markets, indirect bidders are largely foreign central banks. Direct bidders only took 15% of this issuance, which is the low print for them since August, while dealers were left with 7.4% of the auction, an all-time low for the 10-Year.
One Has To Wonder
What would provoke foreign central bankers to trip all over each other in a quite awkward attempt to pay well above market prices for U.S. 10-Year paper ahead of today's January CPI print?
What would provoke portfolio managers across the entirety of the equity marketplace to practically stampede into equity (almost any equity) risk at elevated prices ahead of that CPI release?
Should the January CPI print appear hot, these individuals have to know that the U.S. 10-Year will pay more than 2% today, and that equities (especially "growthy" types) will give back this week's gains faster than you can blink.
It makes me wonder. It's as if somebody knew something.
Big Night at the Guilfoyle's
I came into Wednesday night prepared for action. I had called Uber Technologies ( UBER) my stock pick of the week on a Sunday night "Twitter" Spaces. I came in long equity. I had called Disney ( DIS) my stock pick of the year for Real Money in late December. I came in long equity, as well as short both calls and puts.
Long story short, UBER posted a GAAP profit. I kid you not. UBER earned (GAAP) $0.44 per share in the fourth quarter on revenue of $5.78B, which not only beat consensus, but was up 82.3% from a year ago. Gross bookings were up 51% to $25.9B, which was at the top of previously given guidance. Adjusted EBITDA printed at $86B, which topped the high end of said guidance. The company offered guidance for the current quarter of $25B to $26B worth of gross bookings and adjusted EBITDA of $100M to $130M.
As for UBER's balance sheet, cash is up, long-term debt is down, current assets are up, current liabilities are down. Total assets are down in proportion to total liabilities less equity. The company's current ratio is 1.44, probably (certainly) a lot better than you thought.
Concerning Disney, unless the CPI knocks the stuffing out of this market, I will be called away this Friday, creating a lot of cash. While I will have to reload, this is still preferable to seeing the rally disappear. That story is probably too long to add to this morning note. I will have to come back in a couple of hours with a separate piece for Real Money.
Trading Notes
I covered my Peloton ( PTON) 33/37 February 11 bull call spread. The trade had already worked its magic.
I also bought back the Marvell Technology ( MRVL) $67 February 11 puts that I had written just to get them off the screen. Their value had been successfully drained. That was a nice win. I am for now hanging onto the MRVL $72 calls expiring this Friday. Let's hope that was a wise move. We'll know soon enough.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 228K, Last 238K.
08:30 - Continuing Claims (Weekly): Last 1.628M.
08:30 - CPI (Jan): Expecting 7.3% y/y, Last 7.0% y/y.
08:30 - Core CPI (Jan): Expecting 5.9% y/y, Last 5.5% y/y.
10:30 - Natural Gas Inventories (Weekly): Last -268B cf.
13:00 - Thirty Year Bond Auction: $23B.
14:00 - Federal Budget Statement (Jan): Last $-21.3B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
(Disney and Marvell Technology is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
