* Again, awful breadth in the face of higher Indices...

Volume

- NYSE volume 363M shares, 7% below its one-month average;

- NASDAQ volume 4.02B shares, 27% below its one-month average

- VIX: down 0.75% to 11.95

Breadth

% Movers

Nasdaq 100 Heat Map

Thanks for reading my Diary.

I am heading out early today for an appointment.

Enjoy the evening.

Be Safe

The S&P Short Range Oscillator moved from oversold (-1.18%) to overbought (1.43%) last night.

It is astonishing to me that Cathie Wood still gets a platform on CNBC (and elsewhere):

* Continue to avoid despite much lower prices

Streamers continue to be basement dwellers — Disney  (DIS) , Warner Bros. Discovery  (WBD)  and Paramount Global  (PARA)  are making multi-week lows.

I remain short WBD.

I covered my Disney short too early (though it was very profitable). Bobby Lang got this one right!

The new low in investment short Chegg  (CHGG)  — the gift that keeps on giving. 

* And non confirmation...

Here you go (at 1:15 PM):

(SPY)  +0.01%

(QQQ)  +0.38%

(RSP)  (equal weighted S&P) -0.42%

(IWM)  -1.07%

* Back buying TSNDF ($1.38).

* Adding to MSOS at $7.55 and OXY at $59.75.

* With large intraday ranges...

ADVANCERS

DECLINERS

From my pal Larry:

The market's narrowness continues today — yet the averages are relatively stable.

* And some of the reasons I have been wrong...

I continue to hold on to a cautious view of the markets:

* Equity performance has been top heavy — with five large cap technology companies skewing returns. Nvidia undefined has accounted for 35% of the S&P Index's 2024 performance while four others (Google (GOOGL), Meta  (META) , Microsoft MSFT and Amazon  (AMZN) ) are responsible for another 26% of the annual return. Not since the 1960s have five stocks accounted for so much (61%) of the total market return.

* Corporate profit performance is also reliant of mega cap tech. In 4Q2023 corporate profits rose by +14% but without the seven largest tech stocks there was a -9% drop in profitability. In 1Q2024 corporate profits rose by +6% (but without the contribution of the Mag 7 there was a -2% decline in profits.

* Corporate profit expectations are unrealistic. According to my friend David Rosenberg’s (Rosenberg Research), arithmetically “backing out” from current valuations, the markets expect +17% per year growth in profits over the next five years. This compares to the actual long-run average for earnings growth in a five-year span over the past century of just +6%/year. A profits forecast of +17% is thus a near and highly unlikely two standard deviation event — particularly given the likelihood that the next Administration may be forced to increase both individual and corporate tax rates to fund the U.S. deficit.

From David:

Outside of the distortions around COVID-19 in 2020, this embedded EPS growth forecast was only exceeded by the prior Tech mania in the late 1990s. And we know how that ended — inevitably, that five-year forward earnings growth view reverted to the mean as the sector (typical with manias) became beset with excess capacity. And while it would have been impossible, at the peak in early 2000, to tell anyone that the S&P 500 Tech sector would then endure a two-year -80% bear market, that is exactly what ended up happening. There are clear differences between now and then, but the storyline is that all manias end up confronting the classic Bob Farrell rule #1 on mean reversion.

* The market is not broadening out. Breadth remains weak and the equal-weighted S&P Index is only +3% year-to-date (at last Friday's close).

* Traditional valuation metrics are generally in the 90% tile or higher.

* The breathtaking reset in valuations (since October) could mean reverse. From Rosie:

Regarding the consensus earnings forecast for 2024, it is unchanged since mid-October at $244.80. For 2025, the consensus in mid-October was $270.18 and now is sitting at $277.07. That is the grand total of a 2.6% increase in profit views for next year. What has the S&P 500 done since that time? Try +26%! A 10x surge relative to earnings expectations. So, no — this has been and remains a multiple driven market. It definitely is not an earnings-driven market, despite what the talking heads on bubblevision tell you...

* Interest rates are likely to remain higher for longer. For the short- to intermediate- term, higher rates will provide more competition to historically high equity valuations as they will continue to provide equity-like returns with no risk nor volatility.

* Equities have rarely been as overvalued against interest rates as they are today. Consider that the S&P dividend yield stands at only 1.32% compared to a 5.37% yield on the six-month Treasury note — an uncommon wide of 4x! The equity risk premium is at the lowest level in nearly two decades.

* Global economic growth is expected to be weak (relative to consensus). Elevated mortgage rates will dull housing and continue to threaten commercial real estate, the impact of stacked or cumulative inflation (since 2020) will weigh on the overly indebted consumer and the cost of capital for most companies will be rising (in the face of a maturity cliff in 2025).

* Inflation (particularly of a service-kind) will remain sticky. Beneath the Skin of CPI Inflation: A Stunning Outlier Services CPI Drove Down Everything Else | Wolf Street

* Consensus S&P EPS may be too high. Among other issues, the current move away from globalization and towards reshoring will be corporate profit dampening. Moreover, the likelihood of higher corporate tax rates seems to be rising.

* Political risks are underappreciated. Extreme partisanship will likely translate into continued fiscal irresponsibility from both parties (and a general neglect towards addressing burgeoning U.S. deficits and lofty U.S. government debt loads).

* Geopolitical risks are unlikely to abate.

* Investor sentiment remains bullish and fear is absent.

* Market structure and investor positioning are potentially toxic market influences.

I am honest and transparent. I take ownership for my mistakes.

As long-time readers know, I approach both my roles in writing my Diary and managing Seabreeze as an intimate relationship. It is more than a job to me. I commit 12-13 hours a day towards an objective of providing value-added information/views to our subscribers and of achieving superior investment returns to my Limited Partners.

But during certain periods of time, one's effort is not rewarded. As Warren Buffett once said, "No matter how great the talent or efforts some things just take time. You can't produce a baby in one month by making nine women pregnant."

The chart below (RSP v SPX) vividly shows the market’s narrowness. As seen, the equal-weighted S&P (RSP) has dramatically underperformed the market cap-weighted (and heavily tech-influenced) S&P:

The disproportionate role of five stocks continues to be a conspicuous market feature. Consider that Nvidia's market cap has increased by over $1 trillion in the last thirty days. That increase in value exceeds (by $115 billion) Berkshire Hathaway's  (BRK.A)   (BRK.B)  total market capitalization of $885 billion. The difference is that it took Warren Buffett six decades to build Berkshire Hathaway to that market cap!

My approach towards value investing will not change, even as many investors chase a small handful of stocks and neglect a much larger body of equities.

Our volume of Benjamin Graham's The Intelligent Investor will not be discarded in the trash:

There are periods in which intelligence and a strong work ethic don't translate into superior investment performance. Just look at Warren Buffett's underperformance during the dot-com boom era — a point in time that many pundits "wrote him off. But, over time the market is more than a voting machine — it’s a weighing machine. As proof positive, just look at Berkshire's superior investment returns in the decade following the dot-com boom bust (in which the Nasdaq dropped by -80%).

That said, I remain very confident that our analysis, logic of argument, hard work and experience will translate into valuable info in my Diary and in good returns. My approach of assessing upside reward vs. downside risk (with an eye towards having a "margin of safety") remains the foundation of all of our investments.

I have long felt that interest rates are the overriding determinant of stock prices. And that investor sentiment and liquidity are a distant second and third.

But there are times (again I look to Buffett) when the markets are a popularity contest and behave like a "voting machine" rather than a "weighing machine." This has been the case since November as animal instincts, fear of missing out (FOMO) and liquidity have overwhelmed the markets.

However, over extended periods of time, equity prices are best expressed in the discounted cash flow model below.

Determining valuations based on discounted cash flow models is the foundation of security analysis and our approach to individual stock selection. (Valuations are equal to the expected future cash flows (i.e. dividends) discounted to present value using an Equity Discount Rate ... where P denotes the equity price, E0 is current earnings, k is the payout ratio, g is the growth rate of dividends, and EDR is the Equity Discount Rate).

In the last six months not only have interest rates been ignored in the recent market rally but, arguably and somewhat surprisingly, so have many macroeconomic issues.

But, as the wise man once said, “This too shall change.”

I wanted to end this month's letter by highlighting several concerning charts and tables that form some of the basis for our negative market view:

U.S. Deficit and Debt

We are on an unsustainable path of government debt creation and fiscal imprudence. The unprecedented partisanship that exists in Washington, D.C., is unlikely to change as we lean into a presidential election in November. Nor will the political schism between Democrats and Republicans narrow post-election. Fiscal discipline will likely continue to be ignored by both political parties until it is too late:

Earnings, Price to Book Value and Equity Risk Premium

By most historical metrics, stocks are valued in excess of the 90% tile. Compared to interest rates equities are more expensive at any time in more than two decades:

Mutual Fund Cash Balances

The VIX

VIX is a measure of investor sentiment and risk appetite. Recently VIX closed at 11.86 — at the lowest since November 27 2019. It still remains under 13 today: 

As investors position much more bullishly:

Inflation

Depending on your methodology, core services inflation rose by five to six percent last month. Now commodities (goods inflation) have begun to revive. Higher inflation for longer means higher interest rates for longer:

The Economy

As risks of higher inflation increase, the risks of slowing domestic economic growth are on also on the rise. I call this "slugflation" — a condition unfriendly to equities: 

Some of My Holdings

Representative longs include Occidental Petroleum  (OXY) , Chevron  (CVX) , Exxon Mobil  (XOM) , Green Thumb Industries  (GTBIF) , Trulieve  (TCNNF) , DraftKings  (DKNG) , Elanco Animal Health  (ELAN) , Freshpet  (FRPT) , Morgan Stanley  (MS) , Goldman Sachs  (GS) , Procter & Gamble  (PG) , Green Brick Partners  (GRBK)  and Valvoline  (VVV) .

Representative shorts include McDonald's  (MCD) , Starbucks  (SBUX) , Winnebago  (WGO) , Walgreens Boots Alliance  (WBA) , Medical Properties Trust  (MPW) , FIGS  (FIGS) , Pool Corp  (POOL) , Sleep Number  (SNBR) , B. Riley Financial  (RILY) , Petco Health and Wellness  (WOOF) , Blackstone Mortgage  (BXMT) , Chegg  (CHGG)  and Freedom Holding  (FRHC) .

Bottom Line

Investors see an Investing Nirvana today.

I see a great many uncertainties and a number of market-unfriendly outcomes.

Above all the market remains bifurcated and is not broadening out:

“Today the spread between the S&P [500]’s 0.85% gain and the Dow's -0.09% loss was 0.94 bp. Going back to 01/04/1982, the [S&P 500-Dow Jones] spread was greater than 0.90 bp only 71 times. That's 71 times over 10,700 days. 20 of those happened in 2000.”

- Walter Murphy

Rosie (Dave Rosenberg) responds:

That is a major “yikes!” We are living in a world of 1-in-150 events. The fact that the last time we saw such a massive divergence was back in 2000 surely is cause for pause. The stock market has hit such an extreme in terms of concentration risk that we have Nvidia’s market cap now exceeding the entire FTSE-100 in the U.K. and just three stocks in the S&P 500 (Nvidia, Microsoft, and Apple) represent over 20% of the index.

And equities remain as overvalued against interest rates than at any time in over two decades.

It is as simple as that....

Note: The above has been extracted from some previous Diary submissions and from commentary provided to my investors at Seabreeze Partners.

Dougie Kass

The breadth even this morning is pretty striking. NDX up .8% right now and 79 stocks are down, only 22 up.

From Peter Boockvar:

Claims pop, PPI does not

Initial jobless claims popped to 242k which was much greater than the estimate of 225k and up from 229k last week. Also of note, continuing claims rose back above 1.8mm at 1.82mm, 25k more than expected and still hovering around the highest since November 2021.

That’s the biggest one week count of unemployment benefit filers since August 2023 and puts the 4 week average at 227k from 222k, the highest since September 2023.

Bottom line, is this another one week quirk explained by some state’s reporting issue? We’ll see and whether next week’s claims figure reflects that or not. And if not, we might be on the cusp of a change in tone with regards to firing’s just as we’ve seen with hiring’s.

4 week avg Initial Claims

Continuing Claims

Wholesale prices in May surprised to the downside with a .2% drop vs the estimate of up .1%. The core rate saw no change m/o/m vs the estimate of up .3%. The y/o/y increases slowed a touch to 2.2% and 2.3% respectively vs 2.3% and 2.5% in April.

The BLS said almost 60% of the headline drop was due to a 7.1% drop in gasoline prices. Goods prices ex food and energy rose .3% m/o/m after a 2 tenths rise in April and up 1.7% y/o/y. I’ll argue again that goods prices disinflation has run its course.

Weighing down on services was a sharp 1.4% m/o/m decline in pricing for transportation/warehousing. Prices fell too for machinery and vehicle wholesaling as well as for equipment and portfolio mgmt. Freight transportation by truck fell .6% m/o/m after rising by a like amount in April. I mentioned earlier this week rising air cargo prices, in response to what is going on with the spike up in container prices. ‘Air transportation of freight’ prices fell .3% m/o/m but after jumping by 3.8% in April and 1.2% in March.

Prices were up for auto/parts retailing and apparel, footwear retailing. Final demand services ex trade/transport/warehousing rose .1% m/o/m after a .7% rise in April and are up 4.5% y/o/y.

With regards to inflation in the pipeline, for processed goods, they rose .1% m/o/m ex food and energy while jumping by 1.8% for unprocessed goods.

Bottom line, the sharp drop in gasoline prices and in the services component of transportation/warehousing accounted for about all of the headline and core miss. If this spike in container prices, along with air cargo continues, this should easily reverse to the upside. I still don’t think there is an easy disinflationary path that is so smooth and easy.

Rates are falling as seen and rate cut odds of 2 this year are back up to 74% from 56% as of yesterday’s close.

Core PPI y/o/y

As of 8:34 a.m.:

At 8:53 a.m.:

Upside:

-STSS +34% (receives $30M purchase order for prefillable copolymer syringes to be manufactured at SC facility)

-AVGO +14% (earnings, guidance)

-WLY +14% (earnings, guidance)

-VANI +10% (US FDA clears Investigational NDA; Lifts Clinical Hold for NPM-119, a Miniature Long-Term Subdermal GLP-1 Drug Implant and anticipates launching LIBERATE-1 in 2H24)

-NEXT +7.3% (Aramco and NextDecade confirm heads of agreement for the 1.2 MTPA Long-Term Offtake of LNG from the Rio Grande LNG Facility)

-TSLA +7.0% (CEO Musk: Both Tesla shareholder resolutions are currently passing by wide margins)

-SRPT +6.6% (strength following PFE DMD drug study results)

-CURV +6.5% (earnings, guidance)

-REPL +6.4% (announces $100M private placement financing)

-VNDA +4.6% (Future Pak raises offer to $8.50-9.00/shr)

-BRNS +4.2% (announces Strategic Pipeline Prioritization Following Positive Interim Data from VTP-300 in Chronic Hepatitis B Virus Infections with Phase 1 clinical trial expected in 3Q24; Cutting 25% of workforce offering cash runway into 2Q26)

-GME +3.7% (Citron Research: No longer short Gamestop)

-LOVE +3.4% (earnings, guidance)

-KFY +2.6% (earnings, guidance; raises dividend)

Downside:

-CARA -28% (Oral difelikefalin did not demonstrate meaningful clinical benefit compared to placebo)

-JILL -17% (prices 2M shares at $31/share)

-PLAY -10% (earnings)

-SPCE -10% (Board approves 1-for-20 reverse stock split, effective Jun 14th)

-OXM -4.5% (earnings, guidance)

-ARES -2.7% (prices 2.65M shares at $134.75/share)

From Peter Boockvar:

Update on shipping costs/Sentiment/BoJ/'Complex'

Ahead of PPI today and post CPI I'll give an update on container shipping rates that get updated on Thursday's. Understand the importance of watching this because a majority of global goods produced end up on a ship. The Shanghai to Rotterdam trip rose another $145 w/o/w to $6,177. It's doubled since May 2nd and is up almost 4x off the late 2023 lows. The route to LA rose $50 w/o/w to $6,025.

WCI Shanghai to Rotterdam

WCI Shanghai to LA

As of last Friday, so of course missing the rally this week and likely sending it even higher, stock market sentiment in the Investors Intelligence survey got extreme again. Bulls rose to back above 60 at 60.3, the highest since the end of March while Bears fell to 17.6 from 18.2, thus sending the spread back above 40. AAII today said Bulls rose 5.6 pts to 44.6, the most since early April and Bears fell 6.3 pts to 25.7, a 4 week low. I'll add the Daily Sentiment Index gauge thanks to my friend Helene Meisler. For the SPX it's at 87 and for the NASDAQ it closed at 88. The range is 0-100 with a higher read more bullish and vice versa.

Bottom line, if one is long the big names, they've of course been very right in contrast to the very mixed stock market activity in most everything else. That mood though is extremely giddy and something to keep in mind.

Ahead of the BoJ meeting tonight, Nikkei News yesterday had a story that "The Bank of Japan will consider gradually reducing its Japanese bond holdings at a two-day policy meeting that starts Thursday, taking a step toward normalizing not just interest rates, but the quantitative side as well." As the details remain to be seen, there wasn't much of a market response and the yen still can't get out of its own way because of the wide interest rate differential with US rates.

I read through the Dave and Buster's earnings transcript, where they missed both top and bottom line estimates and saw a 5.6% drop in same store sales, and they used the word 'complex' when describing the 'macroeconomic environment.' We can add that to 'dynamic' that we've heard a lot.

"it's a complex macro environment and it's been challenging. But as we said in our prepared remarks, we are encouraged by the fact that throughout the quarter, we've seen trends improve, and as our initiatives have started to take hold and those initiatives are a combination of both price and traffic." They highlighted a brand new menu and new service model as helping to drive that improvement along with some promotions.

Some more, "There was more weakness within lower income consumers versus moderate income and higher income, and we saw some strengthening in the higher income last quarter. Those trends continued into Q1." They did say they've increased mid week promotions and that has helped bring in more lower income spenders.

While some restaurants are likely to slow the pace of price increases, they are looking to raise prices further as "we have realized significantly less price compared to our peers and believe there's an opportunity for us to optimize our prices and menu mix in order to close this gap."

Broadcom's quarter saw excitement over their AI chips "more than offsetting continued cyclical weakness in semiconductor revenue from enterprises and telcos."

The only thing data wise overseas, and somewhat dated, was the continued weakness in European industrial production where in April it fell one tenth m/o/m vs the estimate of up 2 tenths and March was revised down by one tenth. We know the challenges there on the manufacturing side which fortunately is being offset by a better services situation.

“Today the spread between the S&P [500]’s 0.85% gain and the Dow's -0.09% loss was 0.94 bp. Going back to 01/04/1982, the [S&P 500-Dow Jones] spread was greater than 0.90 bp only 71 times. That's 71 times over 10,700 days. 20 of those happened in 2000.”

- Walter Murphy

Rosie (Dave Rosenberg) responds:

That is a major “yikes!” We are living in a world of 1-in-150 events. The fact that the last time we saw such a massive divergence was back in 2000 surely is cause for pause. The stock market has hit such an extreme in terms of concentration risk that we have Nvidia’s market cap now exceeding the entire FTSE-100 in the U.K. and just three stocks in the S&P 500 (Nvidia, Microsoft, and Apple) represent over 20% of the index. 

Getting larger in my Index shorts in premarket trading:

* Shorted more  (SPY)  $542.38

* Shorted more  (QQQ)  $477.76

My book:

“It is usually a much simpler matter to forecast a bull market than to call the turn at its end.”

- Philip Carret

Bonus - here are some great links:

Rate Cut Optimism 

More In The Three Trillion Club

Talking VWAP 

Will Large Cap Outperformance Continue?

This is a valuable chart for momentum-based short-term traders:

From JPMorgan:

US: Futs are higher with Tech leading and small-caps lagging, the same trend that we saw after the Fed/Powell Press Conference despite small-caps leading the way most of the session. Pre-mkt, Mag7 and Semis are in focus with AVGO +13.6%, TSLA +6.3%, and NVDA +2.4%. Many of the other Mag7 names are lower pre-mkt, but elements of the AI ecosystem are up pre-mkt, e.g., VRT +1.9%. Bond yields are ranging from -1bps to +1bps and the USD is rebounding from yesterday’s sell-off. Cmdtys are mostly higher despite crude and precious metals lower. Today’s macro data focus is on PPI, Jobless Claims, and Fedspeech.

and...

EQUITY AND MACRO NARRATIVE: Over the last week, we have seen the market narrative abruptly shift from recession/stagflation to Goldilocks with improvements credited to ISM-SRVCS, NFP, and CPI. While the markets closed off their highs, with ~$4.5bn to sell MOC, I would focus more on the macro fundamental story. That story is one of resilient growth with a disinflationary trend which gets an ancillary bid from the on-going AI-theme. The most recent data points coming from AAPL (WWDC conference) and AVGO (earnings). Today’s PPI and next week’s Retail Sales will help complete that picture. In Rates, we saw September rate cut expectations move from ~50% to about ~60%, but did peak around 66% in yesterday’s session. Tomorrow, we see Fedspeakers exit their blackout window with NY Fed’s Williams. A few thoughts as you setup your day:

· PPI – Feroli sees a +0.1% MoM print in Headline, in line with the Street; and Feroli looks for a +0.2% in Core MoM, which is below the Street.

o Feroli and team’s PCE forecast is tracking +0.13% MoM and +2.6% YoY after the CPI print and that will update again after the PPI print.

_· AVGO (Josh Meyers) – stock was +10% post-mkt as the company hiked its FY revenue guidance by $1bn and the company announced a 10-for-1 stock split; neither appeared to be expected by investors. “Broadcom's second quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds.”

_· BLOOMBERG HEADLINE – OpenAI annualized revenue doubles since late 2023: information.

_· NVDA (Mike Gormley) – I think this collapse in NVDA market concentration (from 34% of equity market after earnings to 16% last night) is an important positive for the broadening out of this rally. This removes a key risk for investors of a one-stock-market and with AAPL, AVGO we are seeing fresh leadership emerge.

o For context, this is NVDA US volumes vs NDX and NYSE turnover, which combined are around $240bn. I am skipping FINRA/TFA unmatched volumes in this calculation given majority trades on these two exchanges. I am also not including CBOE equity volumes here in matched turnover which is around $50bn. Throwing in CBOE will shift the % down, but no meaningful change.

o US MKT INTEL – dovetailing with Gormley’s thoughts, the combination of ISM, NFP, CPI, and (potentially) next week's Retail Sales resets investor thinking on US economy. Using a baseball analogy, the perception may be moving from an economy in the 8th inning to potentially closer to 5/6th. To me, that means once we get past this CPI squeeze, with potential follow-on effects from a cooler PPI, means that the broadening is coming. I am not sure if it will look like Nov/Dec of 2023 but think the barbell approach (some Tech and some Cyclicals/Value) is prudent; especially with high probability of positive July seasonality.

Wolf Street howls about an outlier services CPI #. (Bears reading!) 

* And raises his buy point...

Apparently Warren has raised his buy order (in price).

Berkshire Hathaway  (BRK.A)   (BRK.B)  purchased an addition 1.7 million shares of  (OXY)  Monday-Wednesday.

SEC FORM 4 (fast-edgar.com)

(That is after purchasing over 2.6 million shares late last week)

We, Seabreeze, added yesterday:

Adding More Occidental

Doing very little after the inflation print.

Adding to (OXY) at $60.55.

Position: Long OXY (VL)

BY DOUG KASS JUN 12, 2024 10:16 AM EDT

From my friends at Miller Tabak:

Wednesday, June 12, 2024

The Fed Blunders, Again

In 2020, the FOMC erred by announcing that it would not raise rates above 0-25 bps until the economy had reached full employment. As a result, the Fed waited too long to hike, making 2021’s inflation surge worse than it needed to be. Interest rates are still 100 bps higher than they would be if the Fed had been smarter and hiked sooner.

At its June FOMC meeting today, the Fed repeated this error, but in reverse. The data since May have shown lower inflation and slower GDP growth, making the Fed’s decision to tighten its posture by predicting just one rate hike this year one of its most surprising decisions in years. This is despite optimism about upcoming inflation data. Its forecast of 2.8% core-PCE inflation throughout 2024 implies just a 2.3% annualized rate between June and December. 500-525 bps is far too high for a 2.3% inflation rate; the appropriate rate is instead around 350-400 bps. Powell noted that the FOMC does not want to “wait for things to break and then try to fix them.” They are now, however, running that risk.

Powell stated that the inflation forecast was the key to moving rate cuts back. The rise in the 2024 core-PCE forecast from 2.6% to 2.8%, however, is entirely due to the January-March data. The real key to the Fed’s stubbornness is that it is still dismissing the mounting evidence of slowing GDP growth. It maintained its 2.1% GDP growth forecast for 2024 despite the 1Q2024 rate of just 1.3%. This requires that growth average 2.4% over the final three quarters of 2024. In other words, the Fed is not dismissing the good inflation data (more on the excellent May 2024 CPI report later), it is irrationally exuberant about the state of the real economy. Here is where the Fed is blundering. Growth will be held back by housing and non-residential investment because the Fed is keeping rates too high. GDP growth will instead be around 1.5%, annualized, for the rest of the year. The good news is that the Fed’s mistake is not yet so severe as to risk a recession.

We initially expected that the May CPI data would re-open the door for a possible July rate cut, but that is now almost surely out of the question. We still expect two rate cuts, one in September and another in December, a view held by eight of nineteen FOMC members. Interestingly, Powell noted that most FOMC officials do not update their projections based on data that arrives during a FOMC meeting, such as the May CPI data. By September, weaker growth and lower inflation will be obvious enough to create a solid majority for cutting.