Official intelligence on artificial intelligence

Stocks rallied yesterday after investors upped their hopes of a rate-hike skip in today’s FOMC policy. Consumer price inflation is slowing but still off target.

In transit. Inflation? What inflation? Back in 2021 the Fed was actively campaigning on the “transitory inflation” platform. Investors and consumers, at that time, had to remain confident to ensure that the Fed-engineered, pandemic recovery would stay on track. A little inflation never hurt anyone, in fact, a little inflation is good, as long as it stays around +2.0%, give or take. So, why worry, consumers? Just keep on consuming to strengthen the economy. AND BESIDES, inflation will come back down once the supply chain (remember the supply chain????) gets back in order. Nothing to see here, this inflation is transitory. Go ahead and search the internet for “transitory inflation” and you will find droves of quotes from Fed officials, especially the one with the biggest office (Jay-P). The campaign worked! Consumers kept consuming and interest rates remained at 0%, which helped spur stock rallies in all things interest-rate-sensitive.

Then it all came crashing down on a chilly November day in 2021 when the very same Jay-P (Jerome Powell) told Congress that maybe inflation is not as transitory as he initially thought. No, inflation was becoming a problem and it may be appropriate for the Fed to act with monetary tightening. That was the hawkish pivot that began to send shockwaves reverberating through the capital markets which ultimately led to significant market declines, lots of pain, and a whole lot of handwringing by retired and nearly retired investors. The Fed’s campaign platform had shifted to “we are inflation fighters, and we won’t stop until it is conquered… at all costs!” And there were costs.

The actual inflation fighting did not start in earnest until early 2022 with the Fed’s first rate increase. It was a toe-dipping of sorts – only +25 basis points, but that would change drastically as the Fed had to fit a year and a half of rate hikes into 9 months, which, one has to admit, it did with panache. So, here we are today, 15 months after that first fateful hike, and it appears that the transitory-come-inflation-fighting crew may take a seat, and perhaps with an Aperol Spritz in hand, admire its handiwork. Inflation is receding. According to yesterday's Consumer Price Index / CPI, year-over-year inflation is now +4.0%! That is more than half of where it was at its height last June and also lower than May’s +4.9% print. Inflation in food and services slowed, while energy prices actually decreased by -1% year-over-year. The one standout was commodities which were flat for the month. This has led markets to largely expect the Fed to keep rates unchanged this month. Despite the good-ish news however, investors are still concerned that inflation is too high, and the futures market has priced in a good chance of at least 1 more +25 basis-point rate hike later this year. Notably gone is any chance of a rate cut from the futures markets. If the Fed indeed announces a skip this afternoon, it will surely make sure to remind us that more hikes may still be needed, but it is clear that we are nearing the end of the cycle of aggressive hikes.

This was indeed a difficult period for the economy, the markets, and for us as consumers. It seemed like things would never let up! Stocks and bonds would continue to get slammed and prices of just about everything would continue to rise! But, alas, the light at the end of the tunnel may be getting bigger, albeit slowly. This makes me wonder. As I look at a chart of inflation over the past 2 years, it certainly looks daunting. When I zoom out and look over the longer term however, I see how in the past how inflation went up and down just as it is currently, and it appears that inflation is, in fact, transitory, as it has always been. One just needs to adjust their timescale. If you are a long-term investor, inflation is indeed transitory, and despite last year’s pain in the markets, you will be successful in the long term. Stay patient, stay focused, and keep your long-term perspective – the numbers are in your favor.

WHAT’S SHAKIN’ THIS MORNIN’

Advanced Micro Devices Inc (AMD) shares are higher by +2.3% in the premarket after it gave investors a peak at its upcoming AI processor. It seems that when you combine the letters “A” and “I” you get applause these days. Rightly so, AI has tremendous opportunity for investors, but separating the wheat from the chaff will become increasingly difficult as more and more companies throw hats into the ring. Potential average analyst target upside: -1.3%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts, like Wells Fargo, potentially raise price targets.

KLA Corp (KLAC) shares are lower by -1.64% in the premarket after Needham downgraded the stock to HOLD from BUY. The analyst reasoned that the recent AI hype has pushed the semiconductor manufacturer’s stock beyond its price target warranting the downgrade. Potential average analyst target upside: -5.1%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts, like Wells Fargo, potentially raise price targets.

YESTERDAY’S MARKETS

Stocks rallied yesterday on a soft CPI print giving investors confidence that the Fed will take a break from the rate hiking to enjoy the budding days of summer. The S&P500 gained +0.69%, the Dow Jones Industrial Average climbed by +0.43%, the Nasdaq Composite Index jumped by +0.83%, and the Russell 2000 advanced by +1.23%. Bonds slipped and 10-year Treasury Note yields gained +7 basis points to 3.81%. Cryptos added +0.50% and Bitcoin declined by -0.18%. The S&P500 ESG Index advanced by +0.72%.

NEXT UP

• Producer Price Index / PPI (May) is expected to have fallen to +1.5% from +2.3%. The Index is expected to have declined by -0.1% after gaining +0.2% in the prior month.
• FOMC Rate Decision will be released at 2:00 PM Wall Street Time and Chairman Powell will address the press AND YOU at 2:30… make sure you are paying attention .