Inflation on vacation?

Stocks rallied yesterday in a mixed close for the indexes, spurred by a positive inflation surprise. The debt ceiling debate rages on and bond traders are demanding higher yields for their trouble.

Take a load off. Because inflation is still the most important factor in the health of your investment portfolio, I will start with a chart for your viewing pleasure. Take a look then keep reading.

This really telling chart, compliments of Bloomberg, gives the viewer a complete picture of what most of us know as inflation. Here is what you need to know about yesterday’s Consumer Price Index / CPI print. First, consumer prices are higher than last year by +4.4%. That is slightly less than last month’s growth of +4.5%. Economists were expecting no change, so we are happy that “the economists” were wrong and that number is marginally lower. Now, look at the chart and you will see a clear trend of declining inflation. In fact, you don’t even have to wear rose-colored, trend smoothing glasses to see that year-over-year CPI declined for the last 10 months in a row. You can’t argue with that! Looking at those pinkish bars, which represent Energy, you can see that it was a big part of the growing problem in 2022, and you can see how those bars not only got smaller throughout the second half of the year, but also how it actually declined in the past 2 months. Check! Next, let’s look at commodities not including food. Those were a big problem starting in 2021. Think of industrial metals, lumber, etc. You know, the stuff that makes the stuff… that makes the stuff that we buy. While inflation in that aggregate is still greater than it was prior to the pandemic, it is clearly in a downward trend, and we can safely put a check next to that. Now let’s talk about food. Those golden-colored bars are still really large, and though this month’s bar was lower than last month’s (+7.7% from +8.5%), it is still a major source of stress on the household wallet. Unfortunately, a lot of the inflation in food is still driven by food-based commodities, which are largely at the mercy of crop yields and the weather. Of course, there are many more factors involved, but the Fed’s monetary tightening will eventually work their way into those. Let’s give that a check mark for improvement, albeit slight. Finally let’s focus on the biggest bar of the bunch. That would be the dark-blue bar which represents services. Services inflation has become the bane of the Fed’s existence. The Fed has put much import on that category, and it asserts that the reason that services inflation is so high is because of wage inflation. You have heard the term “tight labor market” far too often in the past year. The Fed believes that those blue bars can only start to shrink once the unemployment rate starts going up, which it really hasn’t recently. That is also precisely why the Fed is adamant that while its rate hiking may be on pause, rate cuts cannot happen until services inflation improves and/or the labor market worsens. Though it has little to do with wages, one of the categories in services that is worrisome to the Fed is Shelter inflation. That aggregate has risen steadily from March of 2021 and remains high, unaffected by interest rates, climate… nothing. If you, your kids, your grandchildren, or your friends rent and are subject to annual changes, you don’t need me to tell you how that has not been a good situation. Overall, however, the Services category inflation eased to +6.8% from +7.1%. While that is super-high and unacceptable, we will have to count that as a win and give it a checkmark, because even a slight victory deserves to be celebrated.

As you can see, we are a lot better off than we were a year ago when it comes to inflation. But, of course, we are still far from where we should be, and still more than twice as high as the Fed’s +2.0% target. For now, markets seem comfortable that this latest CPI print will be enough to keep the Fed on a hiking hiatus… for now. It is important to note that there are still a lot more data points that will come in between now and the Fed’s June 14^th policy confab, and every single one of them will be deeply scrutinized, appropriately so. For markets, we are not out of the woods yet. There is still that whole “debt ceiling” thing that has yet to be resolved, and while stocks have largely ignored it, bonds, particularly bills maturing this summer, have displayed rising yields to reflect the increase in risk of payment delays. Earnings remain an ongoing concern, and while we are past the midpoint of earnings season, we still have a lot more in store for us in coming days. While celebrating the small victory in the battle with inflation, it is important to remember that the war is still on, so we best keep a weather eye on that enemy.

WHAT’S SHAKIN’ THIS MORNIN’ ☀⛅⛈ 

The Walt Disney Co (DIS) shares are lower by -5.41% in the premarket after it announced that it missed on EPS and Revenues by -1.26% and -0.01% respectively. The company reported a lower-than-expected number of subscribers to its Disney+ offering. The Disappointment in streaming was offset by healthy growth in its theme parks, which, as one would suspect, have benefitted from ongoing loosening worldwide restrictions. Potential average analyst target upside: +23.6%.

Tapestry Inc (TPR) shares are higher by +9.59% in the premarket after the company announced that it beat EPS and Revenue targets by +30.57% and +4.61%. The company also raised its full-year guidance as recession fears grow. The company attributes the improvement to greater-than-expected demand for luxury goods in China. Dividend yield: 3.23%. Potential average analyst target upside: +38.2%.

YESTERDAY’S MARKETS

Stocks rallied yesterday after CPI came in slightly lower than expected. The S&P500 gained +0.45%, the Dow Jones Industrial Average slipped by -0.09%, the Nasdaq Composite Index jumped by +1.04%, and the Russell 2000 Index climbed by +0.56%. Bonds gained and 10-year Treasury Note yields pulled back by -7 basis points to 3.44%. Cryptos added +0.55% and Bitcoin climbed by +0.78%.

NEXT UP

• Initial Jobless Claims (May 6) is expected to come in at 245k, slightly higher than last week’s 242k claims.
• Producer Price Index / PPI (April) may have slowed to +2.5% from +2.7%.
• Fed speakers today: Kashkari and Waller.