I want my iPhone 14, at any cost

Stocks rallied yesterday on hopes that today’s CPI number will dullen the Fed’s sharp horns. People still want their new iPhones, even in tougher times, and yesterday’s rally reflects that undying consumer optimism.

Cheaper but not easier. Quick and simple root cause analysis on why this has been such a difficult time for stock investors. Um… wait for it… inflation, of course. You knew that. We can blame the Fed, the President, Putin, Democrats, Republicans, China, or whomever, it really doesn’t matter because if inflation recedes, stocks will get the all-clear to become your 401k’s BFF (Best Friend Forever) once again. Can we agree on that? Thanks. Ok, so this morning we will get August’s read for the Consumer Price Index / CPI from the Bureau of Labor Statistics. It is just one of 2 premier measures of US inflation. The Fed certainly watches this closely, though it is not the Central Bank’s preferred gauge of inflation. That aside, CPI is the most broadly watched measure of inflation.

There have been many new adjectives introduced to modify the word inflation in the past few years, most notably transitory and peak. You may recall that when inflation began to pop up in early 2021, the Fed began to call it transitory, meaning that it was just a temporary anomaly resulting from the rapid, post lock-down recovery. It was used to quell consumers’ fears of high inflation… and to comfort stock investors fearful of rate hikes. Well, we all know how that one played out… perhaps the Fed was a bit too optimistic in its choice of adjective.

We have moved into a new regime in which we all know that inflation is real and certainly not transitory. Now we are looking for, hoping for peak inflation. In fact, we have been looking for it for the better part of the past 9 months or so. Peak inflation would mean that inflation has been quashed and is retreating to a more normal rate. Earlier this year, March inflation came in at a whopping +8.54%, sending chills down the spines of investors. In April, the CPI receded to +8.25% sparking speculation that inflation had peaked a month earlier. I mean, how could inflation keep growing? Well, it did for the 2 consecutive months that followed, May and June… and stocks certainly reflected their dismay. In June, annual CPI reached +9.05%, a number not seen since 1981! Ok, so the good news is that last month the CPI pulled back to +8.5%, lower than economists were expecting. That left us all with the question “has inflation finally peaked?”

That would certainly be good news because who doesn’t want to pay less for just about everything. Moreover, the Fed would have less of an incentive to continue down its aggressive, oppressive monetary policy path, which would be welcomed by the stock market. There are actually 2 different inflation series due out later this morning. The first is the headline CPI figure, which is the one most of us talk about. That is expected to come in at +8.1%, a pullback from last month’s reading of +8.5%. The further decline is expected to come from the recent decline in energy prices, which I am sure you have noted at the gas pump in recent weeks. Energy prices can be quite volatile, as I am sure you know. It is hard to keep up with what the price of a gallon of gas is. Many gas stations control those big price billboards via computer. No need for those old ladders. Turn ‘em up, turn ‘em down, keep them coming in… and stay profitable at all costs. Food prices are also quite volatile, moving rapidly up and down with commodity prices. Those are highly dependent on weather and crop yields. In case you don’t follow those closely, I will let you know that they are, indeed volatile, especially lately… I follow them so that you don’t have to. Because energy and food prices are so volatile, many economists like to follow what is known as core inflation, which excludes food and energy, and that is the second important number to be released this morning. That number is expected to have risen to +6.1% from +5.9%.

Regardless of which of those 2 numbers you prefer to follow, positive surprises will be much appreciated by the equity markets. The Fed may not be so appreciative in its rate decision next week. Based on the latest Fed Futures, the odds are strongly in favor of another oversized, +75 basis-point rate hike. In the past few days, the US Dollar has come off all-time highs a bit. There are many implications, but the one that is most relevant to today’s discussion is the cheaper dollar’s impact on energy prices. Because the entire world transacts crude oil purchases in US Dollars, a cheaper dollar pushes the price of crude oil higher. In other words, higher energy prices may be lurking around the next corner… er, month. Additionally, with gas prices coming off recent highs, consumers have more discretionary funds begging the question, will those be saved or used for inflation-driving consumption? Confused now? Don’t be, lower-than-expected inflation prints should support recent rises in equities, but don’t expect the Fed to change its rate hiking path anytime soon… unless those core inflation numbers start to show a significant downward trend. 

YESTERDAY’S MARKETS

Stocks gained further ground yesterday after a Fed report suggested that inflation is expected to ease and that there is strong demand for Apple’s new iPhone. The S&P500 gained +1.06%, the Dow Jones Industrial Average climbed by +0.71%, the Nasdaq Composite Index rose by +1.27%, and the Russell 2000 Index advanced by +1.23%. Bonds slipped and 10-year Treasury Note yields rose by +4 basis points to 3.35%. Cryptos edged higher and Bitcoin added +3.55%.

NXT UP

• Consumer Price Index / CPI (August) is expected to have fallen to +8.1% from +8.5%.
• CPI Excluding Food and Energy (August) may have increased to +6.1% from +5.9%.
• This morning, NFIB Small Business Optimism (August) came in at 91.8, beating expectations and higher than last month’s 89.9 reading.