Thanks for reading my Diary today and all week.

Enjoy the weekend.

Be safe.

Wolf Street howls about PPI services inflation.

With S&P cash now only +29 handles (down from being +73 handles) I will take back today's short calls for a quick profit.

From a few minutes ago(!):

I'll Have These Shorts in a Medium

With S&P cash +69 handles, I'm shorting my next tranche of Index calls.

Position: Short SPY calls (M), QQQ calls (M)

BY DOUG KASS JUL 12, 2024 2:08 PM EDT

From Peter Boockvar:

A Succinct Summation of the Week’s Events:

Positives,

1)June CPI unexpectedly fell one tenth headline vs the estimate of up one tenth. The core rate was higher by one tenth vs the estimate of up two tenths. Versus last June, headline CPI is up 3% and the core rate by 3.3% vs 3.3% and 3.4% respectively in May. A 2% drop in energy prices m/o/m for a 2nd month was the main driver of the headline decline. Services inflation ex energy also slowed to a one tenth gain m/o/m, though still up 5% y/o/y. On the core goods side, prices were little changed again m/o/m, down .1% and lower by 1.8% y/o/y.

2)Digging into the NY Fed's Survey of Consumer Expectations for June saw the one yr inflation forecast dip by 2 tenths m/o/m to 3% while the 3 yr guess rose one tenth to 2.9%. The longer 5 yr crystal ball read fell 2 tenths to 2.8%. Hopefully realized, there were drops in price expectations for homes, gasoline, food, medical care, rent and college.

3)After a steady rise in initial claims, for the week ended July 6th they came in at 222k vs the estimate of 235k. That said, because of the July 4th holiday I’ll pay attention to next week’s figure instead.

4)The June NFIB small business optimism index rose to 91.5, up 1 pt from May. While still well under its long term average of 98, it is the best read since December when it was at 91.9. The bottom line from the NFIB is still blaming inflation and higher costs for the challenged outlook. "Inflation is still the top small business issue, with 21% of owners reporting it as their single most important problem in operating their business, down one point from May." The high was 37% in July 2022 when the rate of change in inflation was peaking. It however was 1% in February 2020. From Bill Dunkelberg, "Main Street remains pessimistic about the economy for the balance of the year. Increasing compensation costs has led to higher prices all around. Meanwhile, no relief from inflation is in sight for small business owners as they prepare for the uncertain months ahead."

5)After a dramatic move higher over the past 11 weeks, container prices were flattish for the week ended 8/11. The Shanghai to Rotterdam trip saw the price dip by $8 w/o/w to $8,048. As a reminder, it started the year just under $1,700 and was about $2,000 in February 2020. The Shanghai to LA route saw a $40 price increase w/o/w to $7,512.

6)The Dodge Momentum Index for June, measuring US construction, saw a jump to 198.6 from 179.9 in May. They said "Data centers continued to dominate planning projects in June - fueling another strong month for commercial planning." They mentioned "moderate growth in retail, hotels, and warehouse projects." And, "On the institutional side, weaker healthcare planning was offset by an improvement in education activity."

7)Delta is dealing with industry overcapacity which is impacting pricing but from a consumer demand perspective, "Air travel demand is at record levels, with this past Sunday marking Delta's highest ever summer revenue day. For the September quarter, we expect continued demand strength."

8)China said its June exports rose 8.6% y/o/y which was just above the estimate of up 8%.

9)China CPI in June rose .2% y/o/y which was below the estimate of up .4% but ex food and energy remained stable, rising by .6% y/o/y for the 3rd month in the past 4. PPI fell .8% m/o/m as forecasted and a slower pace of decline from the 1.4% drop in May. It's also the least negative since December 2022 with easy comps being a big reason as PPI fell 5.4% in June 2023.

10)Taiwan reported a 23.5% y/o/y increase in exports, much better than the estimate of up 13.4%. Credit Taiwan Semi and huge AI demand as exports of computers and other tech hardware saw a whopping 324% y/o/y spike.

11)Base pay in Japan in May rose 2.5% y/o/y from 1.6% in April and reflected the recent 'Shunto' negotiations. That is the fastest pace of growth since 1993.

12)GDP growth in May in the UK was up .4% m/o/m, twice the estimate and helped by construction and retail spending/services side of the economy.

13)The Bank of Korea, Reserve Bank of New Zealand and Malaysia’s central bank all kept policy unchanged as expected.

Negatives,

1)Wholesale prices in June exceeded expectations and the May figures were revised higher. The headline gain of .2% was vs a one tenth estimate and May was revised up by 2 tenths. The core rate grew by .4%, double the forecast and May was revised up by 3 tenths. The y/o/y headline gain was 2.6% vs 2.4% last month and the core gain was 3% y/o/y, up from 2.6% in May.

2)Not caught up in the July 4th seasonal adjustment issues, continuing claims remained high at 1.852mm, little changed w/o/w and just below the highest level since November 2021.

3)The July UoM consumer confidence index fell to 66 from 68.2, 2.5 pts below expectations and the lowest since November 2023. It remains well below the February 2020 level of 101. Both components were down with the Current Conditions slice in particular at the weakest since December 2022. Both one year and the longer term 5-10 yr inflation guesses fell one tenth m/o/m to 2.9% for each. The employment and income components weakened. Notwithstanding the moderating inflation, the declining income expectations led to just a 25.3% read of those that ‘expect family income will beat inflation over next 5 year.’ That’s the lowest since the question was first asked in 1998. Spending intentions continued to fall. The bottom line from the UoM, “Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead.” And it is the lower to middle income consumer that is in financial pain. “Despite expecting inflation to ease, consumers remain vociferously frustrated at the persistence of high prices. Almost half of consumers spontaneously expressed complaints that high prices are eroding their living standards, matching the all-time high reached two years ago at the peak of the post-pandemic inflationary episode. In recent months, these comments have been much more prevalent among lower-income consumers, who typically have fewer financial resources to help buffer the pain of high prices. Furthermore, lower-income consumers have reported much weaker income expectations (in both nominal and real terms) than their higher-income counterparts.”

4)From Helen of Troy: "As has been widely reported, the macro environment and the health of consumers and retailers has worsened. Consumers are even more financially stretched and are even further prioritizing essentials over discretionary items. Specific to our business, we have seen some areas become more challenged over the last three months. For example, an unexpected slowdown in the global outdoor category impacted sales of our packs and accessories. There was also more pressure in the specialty beauty channel and mass beauty overall, especially in beauty tools under $100. Also, more discretionary household items like dry food storage continue to trend down…We've heard broadly from mass retail that traffic overall is slower throughout the country and promotional pressure is increasing. In reaction to these dynamics, retailers are managing inventories more closely to account for the slowdown, and some are implementing new systems to allow for just in time inventory management. All of this exposes us to more volatility and less visibility into order volumes and timing."

5)From Pepsi: "there is clearly a consumer that is more challenged and it's a consumer that is telling us that in particular parts of our portfolio, they want more value to stay with our brands. That is not for all the consumers. It's some consumers. That is not for all of the portfolio. It's some parts of the portfolio."

6)From Conagra: "I would say that the value seeking behavior we saw in the last year really was across income cohorts. You're always going to have more sensitivity for the lowest income bracket."

7)From Kura Sushi: "sales in the fiscal 3rd quarter did not meet our expectations. This sales decline, which began mid-April, was sudden and unexpected...We believe the current headwinds are macro driven and transitory…We believe the comp deterioration over the prior quarter was driven by the overall macro environment and consumer sentiment, particularly in California, as well as a degree of cannibalization as we execute our planned strategy of infilling existing markets."

8)In China in June saw a 2.3% decline in imports vs the forecast of a 2.5% rise.

9)China also reported its June loan growth data and aggregate financing was about as expected but continued to show slowing loan growth. Also as part of this, money supply growth continues to slow, with M2 up just 6.2% y/o/y vs 7% in May and well below the estimate of 6.8%. That's the slowest rate of growth since data I have going back to 1996.

10)Germany said its exports fell 3.6% m/o/m in May, worse than the forecast of down 2.8%.

11)The June Sentix investor confidence index in the Eurozone fell to -7.3 from +.3 and well below the estimate of -.5. Sentix said "The recent recovery of the European economy has come to an abrupt end." They cited weakness in the Germany economy and "The French elections are contributing to the growing concern, as is the increasing slowdown in the US economy. The overall index for the US fell for the 3rd time in a row to its lowest value since January 2024."

* Little action in this asset class...

The yield on the 2-year Treasury is 4.46%, -4 bps.

The yield on the 10-year Treasury is 4.19%, -1 basis point.

The yield on the long bond is 4.40%, no change in yield.

* Roger Stone speaks out for cannabis's rescheduling...

With S&P cash +69 handles, I'm shorting my next tranche of Index calls.

Scott Galloway's No Mercy No Malice... "The Financial Frontier"

With S&P cash now +53 handles I am re-shorting the Index calls (for August) that I covered into Thursday's schmeissing.

On a scale higher.

From Peter Boockvar:

The July UoM consumer confidence index fell to 66 from 68.2, 2.5 pts below expectations and the lowest since November 2023. It remains well below the February 2020 level of 101. Both components were down with the Current Conditions slice in particular at the weakest since December 2022. Both one year and the longer term 5-10 yr inflation guesses fell one tenth m/o/m to 2.9% for each. The range for each was 2.2-2.6% in the two years pre Covid.

Employment expectations remained soft, falling by 4 pts to the 2nd lowest read since mid 2023 and not far from the lowest since 2011. Also noteworthy, the ‘net income’ component fell to just 1, the weakest since March 2014. A heavy influence here is from the lower income consumer.

So, notwithstanding the moderating inflation, the declining income expectations led to just a 25.3% read of those that ‘expect family income will beat inflation over next 5 year.’ That’s the lowest since the question was first asked in 1998.

Spending intentions continued to fall. Those that said it’s a ‘good time to buy a vehicle’ fell just 1 pt but to the lowest level since November. As for buying a home, intentions fell 4 pts to the least on record dating back to 1978. Intentions to buy a major household item fell to a 14 month low.

The bottom line from the UoM is something we’re all too aware of. “Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead.” And it is the lower to middle income consumer that is in financial pain. “Despite expecting inflation to ease, consumers remain vociferously frustrated at the persistence of high prices. Almost half of consumers spontaneously expressed complaints that high prices are eroding their living standards, matching the all-time high reached two years ago at the peak of the post-pandemic inflationary episode. In recent months, these comments have been much more prevalent among lower-income consumers, who typically have fewer financial resources to help buffer the pain of high prices. Furthermore, lower-income consumers have reported much weaker income expectations (in both nominal and real terms) than their higher-income counterparts.” The higher income consumer, as we know, is feeling quite differently.

I’ll add, the lower income consumer is in their own personal recession unfortunately.

UoM

Employment Expectations

Income

Mean probability that REAL income will grow in the next 5 years

One yr Inflation Expectations

Vehicle Intentions

Home Buying Intentions

Adding across the board to cannabis.

* And a quick look at PPI

* Let's observe the underlying details/trends 

* Be skeptical of the consensus' view on yesterday's inflation print...

It’s been a long time since I have hit on this topic. 

Unlike some, I don't take numbers at face value - whether it is the quality of an individual company's earnings per share, any consensus and, certainly, the legitimacy of economic releases! 

Good economic data (jobs, inflation, etc.) are necessary for making good policy decisions. Of course data are not the only part, it is possible to make terrible decisions with good data. But if you want to give yourself a chance, you need good data.

Call this a comment as much as it is a question – maybe I am missing something.

The consumer price index on its surface is somewhat dovish. But the “miss” still leaves us at 3%, which is well above target.

The miss is a function of two things:

* Expectations set a bit high so we can miss (not hard to figure out how to do!) 

* The decline in owners’ equivalent rent of residences, which is easily forecastable (my just prior point about setting expectations that are easy to miss).  

At the same time, the Supercore number is still at 5% (well above target) and actually increased month over month. This is a truer, albeit not perfect, picture of what is going on as owners’ equivalent rent of residences (OER) is not in this number.

OER is now precipitously declining and will keep doing so for the next few months. It is just math. But OER is now going down at the same time actual rents have bottomed and now are in the process of going back up (apartment list national average)! What does anyone think is going to happen to rents if interest rates are cut? Talk about the 1970s all over again with the same inflationary pattern re-emerging after the Fed declared victory too soon.

By means of background, something close to 40% of the CPI basket is shelter, it is a made up number, and it badly lags what is going on in the real world, in both directions.

Why are we still managing the economy around headline or even core CPI? The shelter component, by far the biggest portion of the index, is worse than worthless -- it is damaging. The numbers are wrong, but most importantly they badly lag. This is obvious. 

So why are we still using CPI and Core CPI for anything? Same reason the Fed was late to increase rates leading into 2008, and we ended up with a disaster, and the same reason this cycle too when the Fed was very very late to raise. CPI was so far behind the real world, primarily due to OER.

The economy just gets whipsawed and damaged. 

I do not know what I am missing, it seems so obvious that OER is just terrible and with shelter at 40% of the basket, this is a big problem.

Let's take a deeper dive into the direction of actual real world rents now, which is back up. From Zillow, which is consistent with my previous comments -- OER and CPI shelter inflation headed down, but real world rent headed back up:    

The months long slowdown in the rental market appears to be leveling off as the busy summer season kicks off. Rents are growing at their fastest annual pace in nearly a year — though the margins are slim — and concessions offered by landlords and property managers have flattened after reaching a three-year high this spring.

Annual rent growth accelerated in June. The typical rent across the U.S. is now $2,054, according to the Zillow Observed Rent Index. That is up 3.5% from last year, the fastest annual growth since last July. 

* Stacked/Cumulative: Since the beginning of the pandemic, rents have increased by 32.8%.

* Year over Year: Rents are now 3.5% higher than last year.

* Mode: Rents are up from year-ago levels in 48 of the 50 largest metro areas. Annual rent increases are highest in Hartford (7.8%), Cleveland (7.2%), Louisville (6.8%), Providence (6.3%) and Milwaukee (5.7%).

Here is another chart showing actual rents heading back up:

Post Script

The producer price index just came out - hot with an upward trajectory.  

The PPI grew at the fastest pace in 15 months and was the hottest since March of 2023. Service costs soared. The only thing that softened was energy, which is something I would not bet on continuing to happen. The pipeline for PPI (intermediate demand), also accelerated.

PPI does not have shelter or OER, which grossly distorts the inflation metric. As noted above, OER number is wrong, and it badly lags. Thusly, without OER, PPI has a different trajectory than the CPI numbers, except for the super-core which excludes shelter. 

Policy makers should know this, and just throw it out, and focus on the core, and more importantly the super-core, which is still around 5%, and was still up month over month. This is not hard to do at all.

This is my big picture point. I do not get it. This issue is obvious. Bad, really bad mistakes have been made due to the lagged effect of OER and its impact on the CPI. The Fed was badly late to increase twice, due to this issue. A lot of damage was done. An enormous amount. 

Again, one would think it would have been easy for the Fed to look around the impact of OER, and see what was going on underneath the sheets, but the Fed did not. Despite the notion that some in the Fed, like Chairman Powell, claim to focus on the super-core, based on their own actions, they clearly did not. 

Every time CPI prints, the pundits still focus on the headline numbers, too (headline and core) and seemingly ignore everything else, including the super-core number. Austan Goolsbee threw a party yesterday, too: “This is what the path to 2% looks like”, Chicago Fed President Austan Goolsbee said, calling the data “excellent” and “profoundly encouraging”.

Finally, if you truly believe the CPI and the PPI -- it is a threat to corporate margins.   

From Peter Boockvar:

The Russell 2000 rally was not some random event/Yen intervention/Earnings comments/China

The Russell 2000 big rally yesterday and selloff in the biggest names wasn't just a random event as the market got more comfortable with a September Fed rate cut (odds now up to exactly 100% from 76% in the day prior). Yes, the spread between the two groups got very extreme and some mean reversion was due but small and medium sized stocks that have floating rate debt, SOFR plus, have gotten very hurt from the sharp rise in interest rates in a condensed period of time. Speaking of one stock we own, their interest expense doubled in 18 months. Not that 2-3 rate cuts would move the needle too much for them, but it would take some of the edge off in terms of funding costs. Thus, it is no coincidence that the Russell 2000 peaked in early November 2021, just as the Fed was tapering QE and was approaching the fastest rate hike cycle in 40 years.

Talking our book, I certainly hope a shift to value/small/mid has begun.

Russell 2000

3 month SOFR

So that huge yen rally yesterday just as the CPI print hit the tape and resulted in some narrowing of the yield spreads between Japan and the US, it looks like it got some extra help from the Japanese Ministry of Finance with FX intervention. Looking at the fall in BoJ's daily accounts points to it, of about $20 billion. And, according to Bloomberg News, "Local media reported that the authorities had stepped into the market citing unidentified officials." Quite interesting that Japan was all set to act right after the US CPI came out.

Intraday Yen move

Here is what Pepsi said about the US consumer, "there is clearly a consumer that is more challenged and it's a consumer that is telling us that in particular parts of our portfolio, they want more value to stay with our brands. That is not for all the consumers. It's some consumers. That is not for all the portfolio. It's some parts of the portfolio."

"So yes, there is some value to be given back to consumers after three or four years of a lot of inflation. Our cost allows us to do that, whatever we choose to do and that will be one of the interventions that we'll be making in the 2nd half, but not the only one."

From Conagra, a stock we own:

They spoke also about the 'challenged consumer' a few times in their prepared remarks.

"I would say that the value seeking behavior we saw in the last year really was across income cohorts. You're always going to have more sensitivity for the lowest income bracket."

"We are projecting approximately 3% net inflation in fiscal '25."

Delta is dealing with industry overcapacity which is impacting pricing but from a consumer demand perspective, "Air travel demand is at record levels, with this past Sunday marking Delta's highest ever summer revenue day. For the September quarter, we expect continued demand strength."

"With scheduled seat growth decelerating into the fall, June and July will be the low point with unit revenue trends expected to significantly improve in August and beyond."

"Our core customer base is healthy, and demand for premium products continues to outperform the main cabin. We expect the strong growth in business travel to continue, with 90% of companies in our recent corporate surveys saying they intend to maintain or increase travel volumes in the back half of the year. International demand is strong and continues to benefit from demographic shifts, US point of sale changes, and an extension of the leisure travel season."

Here was Jamie Dimon's review of the risks out there in the JPM earnings press release, something any good banker should always recognize.

"While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks. These tail risks are the same ones that we have mentioned before. The geopolitical situation remains complex and potentially the most dangerous since World War II - though its outcome and effect on the global economy remains unknown. Next, there has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. Therefore, inflation and interest rates may stay higher than the market expects. And finally, we still do not know the full effects of QT on this scale."

Of note in their release, "The provision for credit losses was $3.1 billion, reflecting net charge-offs of $2.2 billion and a net reserve build of $821 million. Net charge-offs of $2.2 billion were up $820 million, predominantly driven by Card Services."

At least pre-market, there is disappointment from Wells Fargo's quarter as they said this:

"Net interest income down $1.2 billion, or 9%, from 2Q23 due to the impact of higher interest rates on funding costs, including the impact of lower deposit balances and customer migration to higher yielding deposit products in Consumer Banking and Lending and Wealth and Investment Management, higher deposit costs in Commercial Banking and Corporate and Investment Banking, as well as lower loan balances, partially offset by higher yields on earning assets."

On the lending side, average loans fell 3% y/o/y "driven by declines in most loan categories, partially offset by higher credit card loan balances."

With credit quality, it mostly deteriorated with a rise in net loan charge-offs in CRE and C&I loans. Credit card net loan charge offs rose too, "partially offset by $33 million of lower auto net loan charge offs."

Moving on. China said its June exports rose 8.6% y/o/y which was just above the estimate of up 8%. Whether its via EV's, solar panels and broadly speaking, China remains a global manufacturing powerhouse and they are increasing their exporting presence to the emerging economic world and relying less on the developed world. The issue in June though was a 2.3% decline in imports vs the forecast of a 2.5% rise. Many imports end up in eventual exports and we know domestic growth has been muted.

China also reported its June loan growth data and aggregate financing was about as expected but continued to show slowing loan growth. Also as part of this, money supply growth continues to slow, with M2 up just 6.2% y/o/y vs 7% in May and well below the estimate of 6.8%. That's the slowest rate of growth since data I have going back to 1996. There is deleveraging going (many of it forced upon real estate developers) on but a slow pace of loan demand too.

The Hang Seng rallied by 2.6% overnight but the Shanghai comp was little changed.

M2 Growth in China y/o/y

From Jeffries on JPM and WFC:

Mixed first look here ---------- NII trends only okay, Fees very solid, WFC with the expense guide surprise (magnitude), credit fine (WFC debate), Payment vol 1pt decel (QoQ)

NET ---- JPM and WFC are coming from a different point in the cycle. WFC retail deposit costs are playing catch-up. Cap Mkts fees strong/vs BK Wealth soft.

Into the potential for this new iRate paradigm – where to JPM and WFC fit in? --- and for now, how do these results impact smaller peers at the inverse point of the cycle

Said another way – do these prints matter all for the KRE names?

Citi at 8 --- you cannot not be nervous after the below….

Back soon…

JPM Solid

NII in-line ----- on modest loan growth, only +5 bps IBD decline ---- despite a sizable absolute decline in DDAs (-$33B – vs prior qtr actually +$15B)

Fees strong ---- crushed it in Equities (+20%) and IB (+65%)

Credit looks fine – non-accrual rates flattish, reserve rate slightly higher, losses in-line

Guidance reiterated

CAPITAL – actually repurchased almost $5B hmm

EOP CET1 15.3%

On +$27B RWA growth QoQ

OTHER – Card solid, EOP growth a bit better, NCO rate slight uptick, ACL rate flat, NII flat QoQ trendline (+14% YoY). Fees look strong (R&I?) – interesting in the face of this Visa suit/situation

OTHER – Payments volume decelerated (9% to 8% ---- including April benefit, we thought May fine, June = modestly soft is the new?)……JPM removed merchant processing vol?

WFC soft

NII miss and guide down ----- on 1) higher IBD cost (+12 bps vs cons +7 ---- better than 1Q +17 bps but still soft) and also softer loan growth

NII guide down to down 8-9% vs prior down 7-9% ----- at down -8.5% mid pt = $400M 2H miss

WFC VS JPM NII

WFC asset growth weaker – down QoQ (avg and EOP) vs JPM up QoQ (avg and EOP)

And then the IBD cost point of course WFC +12 bps vs JPM +5 bps ---- and WFC still sitting on a 2.9% IBD cost vs WFC 2.46%

------ Asset yield flattish for both

------ DDA mix down actually a bit worse at JPM (-60 bps) vs WFC (only -30 bps) despite similar size total deposit reductions (%) ----- again IBD cost being the delta

Then the Cost side – guiding up $1.4B for FY – implied 2H is ~$800M too low

Directionally no surprise here

But magnitude……nobody really thought more than ~$500M raise…

I don’t think we should apples to apples this hit = implied continued upside in Fee revs (which beat by $700M in 2Q)

Credit

CIB Office Non-Accrual higher ($550M) --- but ACL/Non-Accrual declined more than 10 pts (to 60.5% from 72.1%

Total reserve release

CAPITAL – Repurchased $6.1B

EOP CET1 at 11%

On a $2B RWA decline QoQ

From Axios:

https://www.axios.com/2024/07/12/ai-bubble-revenue-missing

From Peter Boockvar:

PPI's upside surprise

Wholesale prices in June exceeded expectations and the May figures were revised higher. The headline gain of .2% was vs a one tenth estimate and May was revised up by 2 tenths. The core rate grew by .4%, double the forecast and May was revised up by 3 tenths. The y/o/y headline gain was 2.6% vs 2.4% last month and the core gain was 3% y/o/y, up from 2.6% in May.

Food and energy prices both dropped m/o/m and ex this, core goods prices were unchanged m/o/m but up 1.8% y/o/y. About 60% of the headline drop in goods prices is due to lower gasoline prices. Service prices is where the upside came from with a .6% m/o/m gain and by 3.5% y/o/y.

With services, the BLS said “Over ¼ of the June advance…can be traced to a 3.7% rise in margins for machinery and vehicle wholesaling.” Also higher were auto/parts retailing, deposit services, computer hardware/software retailing and professional/commercial equipment wholesaling. On the flip side, truck transportation prices fell 1.2% as excess capacity is still apparent in the industry.

And we’re of course on the lookout in the months/quarters to come to see what the price pass through will be from the skyrocketing container shipping costs. Someone is going to have to eat that.

Bottom line, I’ve been arguing that we’re in a new era of inflation volatility and today’s figure meshes with that I think. I don’t believe we’re going back to a 2% inflation rate and magically staying there. Also, I’ll say again, having inflation fall after the spike is one thing, keeping inflation down is another. So, while we’re going to get a rate cut in September and likely another in December, this rate cutting cycle is going to be VERY different than what we got used to for decades in response to every economic downturn where policy rates was slashed and burned and with a large does of QE. The Fed I believe is just not going to have the same wiggle room to react.

As PPI is rarely market moving, today is no different and Treasury yields are little changed as is the dollar, after yesterday’s selloff. The 5 yr inflation breakeven is up by 1 bp but after falling by almost 6 yesterday in response to CPI.

Core PPI y/o/y

From Liz Ann

From Goldman Sachs:

What happened:

JPMorgan reported investment banking revenue for the second quarter that beat the average analyst estimate.

Q2 Results:

Managed net interest income $22.86 billion, +4.5% y/y, estimate $22.82 billion (Bloomberg Consensus)

Adjusted revenue $50.99 billion

Investment banking revenue $2.46 billion, +46% y/y, estimate $2.13 billion

FICC sales & trading revenue $4.82 billion, +4.6% y/y, estimate $4.85 billion

Equities sales & trading revenue $2.97 billion, +21% y/y, estimate $2.66 billion

Advisory revenue $785 million, +45% y/y, estimate $640.5 million

Equity underwriting rev. $495 million, +56% y/y, estimate $387.6 million

Debt underwriting rev. $1.08 billion, +51% y/y, estimate $905.9 million

EPS $6.12

Loans $1.32 trillion, estimate $1.32 trillion

Total deposits $2.40 trillion, estimate $2.43 trillion

Provision for credit losses $3.05 billion, estimate $2.83 billion

Net charge-offs $2.23 billion, estimate $2.26 billion

Compensation expenses $12.95 billion, estimate $12.72 billion

Non-interest expenses $23.71 billion

Net yield on interest-earning assets 2.62%, estimate 2.65%

Standardized CET1 ratio 15.3%, estimate 15.1%

Managed overhead ratio 47%, estimate 52.1%

Return on equity 23%, estimate 17.4%

Return on tangible common equity 28%, estimate 22.4%

Assets under management $3.68 trillion, estimate $3.67 trillion

Tangible book value per share $92.77, estimate $91.42

Book value per share $111.29, estimate $110.59

Cash and due from banks $27.27 billion, estimate $22.78 billion

Commentary:

Qtr Incl $821M Net Reserve Build

Dimon: Continue to Be Vigilant About Potential Tail Risks

Dimon: There Has Been Some Progress Bringing Inflation Down

Net Reserve Build Included $609M in Consumer

Dimon: But There Are Still Multiple Inflationary Forces

Net Reserve Build Included $189M in Wholesale

Dimon: Inflation & Rates May Stay Higher Than Market Expects

Dimon: Do Not Know Full Effects of Quantitative Tightening

Qtr Incl $546M of Net Investment Securities Losses

Stock reaction:

JPM is down -0.8% in premarket trading, $205.80 last

Here's a chart of the most active pre-market ETFs as of 8:24 a.m.:

Here are the most active stocks percentage-wise as of 8:42 a.m. ET:

Here are the U.S. Select Premarket Movers as of 8:28 a.m. ET

Upside:

-IMMP +16% (reports positive results in First Line Head and Neck Squamous Cell Carcinoma patients with negative PD-L1 expression)

-TECK +5.1% (hearing Company is potential M&A target for Rio Tinto)

-FAST +4.4% (earnings, guidance)

-ACHR +3.3% (Southwest Airlines signs MoU with Archer Aviation to develop operational concepts for air taxi network in California)

-C +2.7% (earnings, guidance)

-DDD +2.6% (NAMI selects 3D Systems’ Metal & Polymer Additive Manufacturing Solutions to power supply chain for Saudi Electricity Company)

-DJT +2.4% (strength off President Biden NATO Summit presser)

-BK +1.7% (earnings)

Downside:

-ASPI -17% (files to sell public offering of common stock of indeterminate amount)

-NNE -8.5% (prices upsized $18M underwritten offering)

-LUXH -7.6% (prices 30M shares at $0.17/share)

-WFC -5.3% (earnings, guidance)

-SNOW -3.8% (AT&T discloses update on incident from Apr 19th with threat actor accessing call logs and AT&T workspace on a third-party cloud platform; Data was reportedly obtained by Snowflake)

-TSLA -2.1% (launches new Model 3 long range rear-wheel drive in the US at $42.5K; UBS cuts TSLA to Sell from Neutral, price target: $197 from $147)

* A suboptimal strategy?

From Larry:

* Demand for the "Magnificent 7" stocks may have been finally sated.

* The odds favor an end to the one-way market in which the Mag7 dominated.

* The time for a long/short book (vs. long only in Mag7) may now be at hand.

The vicious and extreme market rotation on Thursday may mark a seminal point of the bull market that began in October, 2022:

In Thursday's premarket I made an aggressive (and lucky) call after the "cool" inflation print that it could unleash selling:

John Bogle once said, "Don't look for the needle in the haystack. Just buy the haystack!"

That approach and dictum have not worked in the last 20 months; what has worked has been a small handful of large tech stocks.

This could change now - or at the least the odds of it changing has likely increased.

The old adage that the we are in a market of stocks may finally take hold - as on Thursday a vicious, extreme and unprecedented inflection point in market rotation occurred:

I don't know (nor does anyone else know) whether the love affair with Mag7 has ended and whether demand has finally been sated for those anointed stocks. Nor can we possibly know - with certainty- whether the market's advance will broaden out.

Today you will hear a lot of certain voices - from "talking heads" who are loaded with technology stocks.

My voice is less certain (as I am always in doubt) than most. Grandma Koufax taught me that I should always be fearful of the Cossacks.

I don't deal in narratives - with a calculator in hand and a contrarian streak I deal in probabilities.

I would suggest that the probabilities now favor that the "league leading" Mag7 may have made a significant top and the rest of the market might have problems with a sustained rally:

* On the first point I would say that the odds favoring an important top in Mag7 might be hand. I have spent months describing how the rubber band of tech has been stretched.

* On the second point I would say that, given the economy's deterioration and my expectation of an extended period of subpar economic growth in which interest rates stay relatively high - the market will not have a sustained period in which participation broadens out into the other 493 members of the S&P Index.

From Rosie this morning:

Not just that, but the segments of the stock market that did best yesterday were the same ones that deflated the most in the CPI report — as in, the areas seeing the weakest pricing. So, this smacks more of a value trade built on technical and short-covering as opposed to anything durable. Growth stocks are generally where you want to be in this environment, but they are too pricey, especially in the Tech space — but to be going long “value” stocks despite their more alluring valuations in a 1%+ GDP growth backdrop with declining pricing power makes absolutely zero sense. 

I am also increasingly confident that a turn in the prospects for a long/short book (vs "long only") is at hand in the new "market of stocks."

“Rotation is the lifeblood of any bull market.”

- Ralph Acampora 

Bonus — Here are some great links:

A Tale of Haves and Have Nots

Will The Streak of Low Vol Continue? 

Where Is the Bear News?

Bonds Are Ready to Rip

For years I have warned about the impact of a changing market structure in which passive products and strategies that worship at the altar of price will whip around the market.

Yesterday we saw it in spades — with smaller-caps' outsized performance against league leaders (Mag 7).

Another example was the extreme inflection point in homebuilders: 

Kill the machines before they kill our markets!

And real important ones (!):

The S&P Short Range Oscillator has risen to an overbought 4.62%.

As recently as last week it was negative (oversold).

Wolf Street howls about the inflation report. 

We have a lot to unpack today after Thursday's important price action.

Let's start with my friends at Miller Tabak:

Thursday, July 11, 2024

Deflation Is Now a Real Risk

Last year, we warned readers that inflation would spike in early 2024 as productivity growth normalized. We also predicted that inflation would settle down by mid-year. Although the January-March inflation spike was larger than we forecasted, the June CPI report confirms that the higher inflation has passed as we expected. Core-CPI (red in Figure 1) was just 0.8% annualized, bringing it to 2.1% for the entire second quarter. Supercore (blue), which also removes shelter and is closer to what core-PCE inflation will show later this month, was -0.3%, its second consecutive deflation. For the quarter, it was just 0.6%. Finally, services, ex-shelter, was 0.8% in June and 2.0% for 2Q2024. This sector suffered from the highest inflation readings earlier this year and some FOMC members have, wrongly, seen it as predictive of upcoming inflation.

Figure 1: Core (blue), Supercore (red), and Services, ex-shelter (green) CPI-Inflation

The FOMC now has an entire quarter of excellent inflation data to give it “greater confidence” that inflation is not coming back. For three reasons, investors should focus on the second quarter data and discard the first quarter. First, it is obviously more recent. Second, supporting evidence makes clear that the second quarter is a more accurate measure of underlying inflation than the first. The first quarter data were distorted by supply-side factors, especially productivity, but these are now of much less importance. The economy is back to being demand-driven. Furthermore, inflationary expectations remain in the 2.0%-2.5% range. Third, the June data, along with mounting evidence of slower growth (more on this later), introduces a new risk, that that inflation could soon turn negative into a deflation. Interest rates remain more than 200 bps above neutral, demand is slowing, and if the FOMC is too slow to start cutting, inflation could fall well below the Fed’s 2% target. This may sound desirable after the recent high inflation. But hoping for deflation is akin to wishing for hypothermia during a heat wave. Deflation is terrible for an economy, would weaken balance sheets, and would be a significant drag on growth.

We maintain that the Fed should have started cutting by March and that a July rate cut should be a no-brainer. Nevertheless, the Fed has backed itself into a corner and some members continue to overreact to the 1Q2024 inflation surge because they don’t understand what caused it. The first 25 bps cut will thus instead occur in September. The data have caused us, however, to upgrade our forecasted pace of rate cuts. We continue to see 50 bps of cuts in 2024, but we now expect 125 bps in 2025 to bring the Federal Funds rate to 350-375 by December 2025. The Fed will then lower to 275-300 bps in 2026.