Stocks rallied to close out a month of solid gains for the assets class. A lower-than-expected inflation figure helped the rally.
Don’t fight the… cartel! We got a hint of good news last Friday when the Bureau of Economic Analysis released its Core PCE Deflator for the month of February. This favorite-of-the-Fed inflation indicator came in at +4.6% which was slightly lower than expected and came with a slight downward revision of the prior month to boot. As one would expect, this slightly softer number was a positive sign for stock investors who would like to see the Fed ease back on its aggressive economic curbing. While this latest print may take some pressure off the Fed, it is still unarguably higher than the central bankers’ +2.0% target. That said, we are not quite out of the woods yet, and though futures (aka the market) adjusted to the news, there still remains a 63% of another +25 basis-point hike on May 3rd.
Digging into last Friday’s release, we see a continuation of the year-over-year disinflationary trend in Durable Goods which rose by +0.7%, which ran as high as +10.7% in early 2022. Non-durables, which includes things that generally don’t hurt when dropped on your toes or things that we consume, remains elevated at +5.4%, but also far better off than they were a year ago when they were growing at +10.7% as well. The holdout category in that aggregate should not surprise you. Food and Beverages rose by +9.7%, only slightly below its +12.7% peak late last year. So, it is trending lower, but only slightly. Within that category, the subcategories of Processed Dairy Products and Eggs provided significant inflationary pressure, up by +13.1% and +55.4% respectively. Moving on from Goods inflation, we get to the Services category which rose by +5.7%. The Fed has been quite vocal in its concern over this category. It includes Housing, which rose by +8.2%, spurred on by Rent (+8.8%) and Electricity and Natural Gas, which, combined, rose by +14.7%, and showing only a slight improvement over last month. Transportation Services remains stubbornly high at +15.1% just below its peak. The drivers of that category’s ongoing troubles remain Auto Leasing and Air Transport, up by +25.6% and +26.7%.
That brings us back to a category which was the cause of much stress in 2021 and 2022, Gasoline and other Energy Goods. That was growing consistently around +50% from the late spring of ’21 through the summer of ’22 before slowing for the second half of last year. This latest PCE report shows the category falling by -0.9% from a year earlier. That is a really good sign as most of us rely on products in that category for our day-to-day existence. The principal reason for the decline is increased supply, as US and other producers kicked up production, and lower demand as global industrial economies slowed. While that may be good news for consumers, it is bad news for producers. While crude oil is a commodity, it is still controlled by a cartel, that being OPEC+. The cartel’s member nations rely heavily on the price of oil, as it is their primary source of sovereign wealth. That said, price declines were not as welcomed by OPEC+… so they did something about it. OPEC+ made a surprise announcement, WHILE YOU SLEPT, to cut crude oil production by -1 million barrels. The move was unexpected by most analysts, and naturally, there are many implications, some immediate and some longer-term ones. The price of crude jumped on the news (less supply). Longer term, we can expect those supply cuts to find their way back to pumps. That’s right, the move is inflationary. Bond traders agree, and they pushed up bond yields in response. That should serve to throw some ice on last week’s growth stock rally. There is no rest for the weary.
WHAT’S SHAKIN’ THIS MORNIN’
If you paid attention to the last section, you would not be surprised to find that 18 out of the 20 top S&P premarket winners are in the energy sector, topped by Marathon Oil, Halliburton, APA Corp, and Occidental Petroleum, adding +7.05%, +6.83%, +6.77%, and +6.28% respectively.
Extra Space Storage (EXR) shares are lower by -3.16% after the company announced a $12.4 Billion acquisition of Life Storage (LSI) which is higher by +1.65% in the premarket. Dividend yield: 3.97%. Potential average analyst target upside: +5.7%.
FRIDAY’S MARKETS
Stocks rallied strongly on Friday as traders responded to a lower-than-expect inflation figure. The S&P500 rose by +1.44%, the Dow Jones Industrial Average climbed by +1.26%, the Nasdaq Composite Index traded higher by +1.74%, and the Russell 2000 Index jumped by +1.93%. Bonds advanced and 10-year Treasury Note yields declined by -8 basis points to 3.46%. Cryptos climbed by +2.46% and bitcoin advanced by +0.86%.
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