You wouldn't call Wednesday morning's CPI inflation report for August "too hot." You would not call it "too cold." Understanding all that, I would not call August CPI "just right" either. I would call yesterday's "slightly" warmer than expected CPI report for August "uncomfortable."
Financial markets did not move much at all on the news. But that hardly means that they were comfortable or that traders and investors saw the release as a "Goldilocks" type of outcome.
August CPI on a month-over-month basis increased 0.6% at the headline and 0.3% at the core. This headline growth had been driven largely by this summer's surge in energy prices and had been expected. The core rate was indeed an acceleration from the back-to-back 0.2% prints seen for both June and July and was a tick above expectations. The month-over-month headline print, despite being anticipated, was quite notable -- and the hottest month for headline consumer-level inflation since June 2022.
On a year-over-year basis, headline August CPI hit the tape at growth of 3.7%. This was up from July's 3.2% print and June's of 3%. This was also a tick above expectations. Core inflation, on an annual basis, showed growth of 4.3%, down from June's growth of 4.7%, and right on consensus view.
Explaining It All
The bogeyman, as expected, came in the form of rising energy prices, but he did not come alone. The bogeyman had friends.
Energy prices popped in August for month-over-month growth of 5.6%, including gasoline prices that increased 10.6% and heating/fuel oil prices that rose 10.5%. I remind you -- these eye-popping moves all occurred over the course of just one month.
Other price moves also jumped off of the page at me. Motor vehicle insurance prices grew 2.4% m/m, while airline fares "soared" 4.9% above July's pricing.
Getting into some of the nitty gritty, ex-energy services pricing was up 0.4% m/m and 5.9% y/y. This broken-out-data continue to be supported by dated prices for shelter, as we have discussed here in the past. "Rent of Primary Residence'' prices showed month-over-month growth of 0.5% and year-over-year growth of 7.8%. We know that rents asked, while still higher, have decelerated from that kind of growth. That said, "Owners equivalent Rent" was also rather hot (+0.4% m/m, +7.3% y/y).
We have also seen growth in home prices decelerate of late. As shelter, which is still up 7.3% year over year on the whole, runs with a lag, this could end up disguising future inflation elsewhere moving forward and into 2024, as it had camouflaged much of early 2023's overall disinflation. Speaking of disinflation, core goods pricing, in August printed at -0.1% m/m and +0.2% y/y.
Market Reaction
The action across Treasury markets remained almost muted in the wake of that CPI report. The yield paid by the U.S. 10-Year Note dropped one basis point to 4.25%, which is where it still is as I work my way through the wee hours.
The U.S. 2-Year Note went out on Wednesday at a yield of 4.98%, down three basis points. This morning, the 2-Year Note yields a fraction of a basis point less than that.
The U.S. Dollar Index, which will be impacted by this morning's ECB policy decision, basically moved sideways on Wednesday, trading in a 104.65/104.8 range.
Glancing at Fed Funds Futures markets, the probability for no rate change at all next Wednesday (September 20) has moved up to 97% from 93% 24 hours ago. These markets still see a roughly 57% likelihood that the FOMC is done hiking rates for this cycle, though a hike on November 1 would not surprise your author at all. We'll see plenty of additional macro before we get there, though.
Fed Funds Futures are now pricing in a 64% probability that the FOMC initiates the first rate cut of the cycle on June 12 and a 99% probability that the FOMC initiates the first rate cut of this cycle at any point in 2024.
Stocks
Equities were sort of flat on Wednesday. Small-to mid-caps struggled more than did large-caps. The banks gave back some of Tuesday's run.
The major indexes closed slightly higher. The Nasdaq Composite ended the day up 0.29% as the S&P 500 closed up 0.12%. The Philadelphia Semiconductor Index led the way, up 0.55%, while the KBW Bank Index surrendered 0.9%.
The small-cap Russell 2000 stumbled to a loss of 0.78%. The Dow Industrials gave up 0.2%, which was really a function of just how narrow that index is, and an example of why it is no longer considered to be a "major," as 3M ( MMM) pulled the "blue chip" index into the red with a 5.7% loss for the session.
Six of the 11 S&P sector SPDR ETFs shaded green for the session, led by the Utilities ( XLU) , as four of these funds closed in the red, led lower by the REITs ( XLRE) . The XLU was up 1.2% for the session, while the XLRE was down 1.01%. Everyone else finished in between +0.79% and -0.75%. The Financials ( XLF) actually closed the day unchanged as losses across the banking space were offset by gains in "specialty finance" and investment services.
Interestingly, with the major large cap equity indexes closing slightly into the green and with most of the sector SPDRs doing the same, breadth was negative. Losers beat winners at the NYSE by roughly 3 to 2 and at the Nasdaq by about 5 to 3, Advancing volume took just a 35.4% share of composite NYSE-listed trade and a 49% share of composite Nasdaq-listed trade.
What was hard to miss was the increased trading volume. On a day-over-day basis, aggregate trading volume increased for both NYSE and Nasdaq listings as well as across both the S&P 500 and Nasdaq Composite. Is this meaningful? With the major indexes and most of the sectors closing slightly higher, but with most individual stocks closing lower and and the lion's share of volume initiated on the "sell" side of the trade? I don't think so. I think there was more trading activity following the CPI print than actual asset allocation.
Armed and Dangerous?
Arm Holdings ( ARM) was finally priced for its initial public offering late Wednesday at $51 per share, which was at the top of the range. This will raise $4.87B for majority owner Softbank ( SFTBY) . The parent is selling 95.5M ADRs (American Depositary Shares). At $51 per share, Arm Holdings is valued at a rough $54.5B. Underwriters will be granted the option to purchase as many as 7M additional shares.
This deal leaves Softbank with control of about 90% of the company. Notable among the firm's investors are some of its largest customers. We're talking household names such as Intel ( INTC) , Apple ( AAPL) , Nvidia ( NVDA) , Samsung Electronics, and Taiwan Semiconductor ( TSM) .
No, I am not interested in ARM from a personal perspective at least until I see how it trades.
Similar, Yet Different
We all know that Apple ( AAPL) had run from the start of the year into July, and then stumbled. I told readers on Wednesday morning that I would add to AAPL down to $172, and I did add to that position on Wednesday afternoon. I showed readers the rising wedge pattern that closed in July, resulting in what may or may not be a cup-with-handle pattern:
Now, what about Berkshire Hathaway ( BRK.B) ?
That stock has a huge equity stake in AAPL, and had the same rising wedge pattern that closed in (late) July. For BRK.B. though, as the wedge closed, there was a small upside pop. Thus produced a smaller cup-with-handle pattern, which these shares now appear to be breaking out of... to the upside.
Yes, I am long BRK.B too, so I am not rooting for one and against the other. That said, as AAPL tries to find a bottom, BRK.B has traded at record highs both on Tuesday and on Wednesday of this week.
With BRK.B comes the equity risk that AAPL currently presents and I am sure that the drop in the share price of AAPL has hurt Berkshire's book value, but has this equity risk (not so premium) been offset by Berkshire's other businesses? Is there enough improvement across the insurance underwriting business? That along with (more so than) ice cream and railroading is Berkshire's bread and butter.
That and Berkshire's cash position, which back in June, had grown to $147.4M. For years, the firm's overgrown cash position was just cash, as Warren Buffett and Charlie Munger could not find enough sizable value-type investments to place all of their dough. Now, T-Bills pay anywhere from 5.39% (30 days) to 5.53% (six months). All while bearing little to no risk.
For BRK.B, I am working with a pivot of $366 and a conservative target of $405. I may still push that target to $420 depending on whether or not I have to move the pivot.
I reduce at a breaking of the 50-day simple moving average ($353). I panic at a break of the 200-day line ($325).
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 225K, Last 216K.
08:30 - Continuing Claims (Weekly): Last 1.679M.
08:30 - PPI (Aug): Expecting 0.4% m/m, Last 0.3% m/m.
08:30 - Core PPI (Aug): Expecting 0.2% m/m, Last 0.3% m/m.
08:30 - PPI (Aug): Expecting 0.9% y/y, Last 0.8% y/y.
08:30 - Core PPI (Aug): Expecting 2.4% y/y, Last 2.2% y/y.
08:30 - Retail Sales (Aug): Expecting 0.2% m/m, Last 0.7% m/m.
08:30 - Core Retail Sales (Aug): Expecting 0.5% m/m, Last 1.0% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +33B cf.
The Fed (All Times Eastern)
Fed Blackout Period.
