Delta Air seeks permission to launch

Stocks fell yesterday in response to a growing fear at the Fed, according to minutes of its last meeting. Inflation eased ever so slightly, but still not enough to move the needle on rate expectations.

A rising concern. There was lots of interesting news yesterday and it was confusing enough that markets have still not completely weighed in on it yet. First, let’s start with headline inflation. That, according to the latest Consumer Price Index / CPI, showed a +5% increase in consumer prices from last year. It declined from the prior month, but it is still more than 2 times higher than the Fed’s target. There is more… some good some not so good. On the following chart, you will notice the overall monthly decline in overall inflation *GOOD*, a monthly decline in commodities prices *GOOD*, a mild monthly decrease in food prices *MILDLY GOOD*, an ever slight monthly decline in services *FINALLY, BUT TOO LITTLE TO APPLAUD*, a year-over-year decrease in energy prices *REALLY GOOD*, and finally, as shown by the dotted white line, a slight monthly increase in the core CPI *OUCH*. On that last one, core CPI, the increase is slight, but it does show that core inflation remains sticky, and it is likely to concern the already concerned Fed. Based on that little nuance, markets barely changed their projections for rate hikes, still expecting another +25 basis points in either May or June. But later in the day, we got another data point and that is where things get a little weird. Check out the chart and keep reading.

Mid-session, at 2:00 PM Wall Street Time, the Fed released minutes from its last FOMC meeting, which took place in the shadow of those 2 painful bank failures. What was discussed? Still more rate hiking. But wait, there is more. Fed staffers now expect a mild recession later this year. Wait what? The Fed thinks we are going to have a recession, partially caused by the banking sector gaffe, and they are still intent on rate hikes? Yep, that is the case. Treasuries, futures, and overnight index swaps all continue to expect at least another hike. Now equity markets are noticing. Not necessarily the rate hike, but… wait, did the Fed say recession? Indeed, it did, but it was tempered by the mild adjective. So, it appears that the Fed is willing to accept a mild recession in order to combat sticky inflation… that is the message.

If the Fed is right that any recession would be a mild one, there may be a silver lining. Yes, it is still a recession, which will certainly dampen the prospects for the consumer discretionary sector… but only mildly as the Fed’s own language paints it. And interest rates, well, the probability for any additional hikes beyond this next one is low. Let’s call this next hike the final nail. If stocks are always trying to forecast conditions beyond the horizon, they should start to reflect a slightly lower rate environment, and it is likely that the markets are already doing so. So where is the big pop? That is only likely to happen when the Fed officially pivots. Right now, the Fed is being intentionally ambiguous on that. There is, however, a noticeable toning down of hawkish talk amongst FOMC members, and that may be all we get for now.

WHAT’S SHAKIN’ THIS MORNIN’

Delta Air Lines Inc (DAL) shares are higher by +4.18% in the premarket after it reported that it missed Revenue and EPS targets for Q1. The stock is higher due to Delta’s raising its Q2 guidance and full year guidance. Full year guidance is significantly higher than average analyst estimates. The company attributes the bullish guidance to “record” advance summer bookings. Good for the stock… not so much services inflation in which airline travel has been playing a big role. Potential average analyst target upside: +53.2%.

Fortinet Inc (FTNT) shares are higher by +1.43% after it got a price target boost from Barclays which also maintained its OVERWEIGHT rating. The company is set to announce earnings on May 4^th. Potential average analyst target upside: +6.3%.

YESTERDAY’S MARKETS

Stocks struggled to maintain early gains from a slightly softer inflation figure, but gains turned to losses with the release of the FOMC minutes. The S&P500 fell by -0.41%, the Dow Jones Industrial Average declined by -0.11%, the Nasdaq Composite Index traded lower by -0.85%, and the Russell 2000 Index dropped by -0.72%. Bonds gained and 10-year Treasury Note yields slipped by -3 basis points to 3.39%. Cryptos gave up -0.57% and Ethereum survived a large tech upgrade and gained +0.74%.

NEXT UP

• Initial Jobless Claims (April 8) is expected to come in at 235k, slightly above last week’s 228k claims.
• Producer Price Index / PPI (March) may have slowed on an annual basis to +3.0% from +4.6%.