3 Strikes, Inflation Deep Dive, Ugly Auction, Clueless Fed, Treasury Double Whammy
At this point, with inflation resurgent and the economy still growing, a 25-basis point rate hike should be under consideration as much as any rate cut.
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At least that one's over.
Wednesday was a tough one, as trading sessions go. It all started out with a hotter-than-expected CPI print for March. Not scorching. Just hot, but hot across the board.
Month over month? Hot. Year over year? Hot. Headline as well as core? Hot. A third consecutive month of warmer-than-expected consumer pricing left traders and investors a little stunned.
What took the report higher? Energy commodities, gasoline, electricity, apparel, transportation services, and medical care services. In short, stuff consumers mostly need.
What was cold? Food at home and vehicles both new and used. Shelter, long the bogeyman of this report, ran in line with on a month-over-month basis with the pace of inflation at the headline. Good luck with March PPI this morning.
Unfortunately, that's not where the bad news ends. There's more. Plenty more.
The United States Treasury Department auctioned off $39B worth of new 10-Year Notes. The auction was simply disastrous, and I do not exaggerate. The aggregate lack of demand for 10-year U.S. paper was impossible to miss across both foreign and domestic buyers.
The high yield awarded printed at 4.529%, tailing the "when issued" by 3.1 basis points at the time. This was the largest or "longest" tail for this series since way back in December 2022. Bid to cover dropped to 2.336, also the weakest for this series since that December 2022 auction.
The internals within this auction were even worse. Indirect Bidders or foreign accounts took down just 61.8% of the issuance, the smallest share for this group since October 2023, while Direct Bidders or domestic accounts only grabbed 14.2%. That was the smallest share for U.S. accounts of any auction in this series since way, way back in November 2021.
Dealers were stuck with a very ugly looking 24% share of this entire auction. That was the largest share of any 10-Year note auction that dealers had to eat since November 2022. Ugly. Good luck with the Treasury's auction of $22B worth of 30-Year Bonds this morning.
Lastly, the Federal Reserve Bank released the Minutes of their March 20 policy meeting. This publication really showed just how absolutely clueless several of the central bank's participants really must be. Several of us had been warning them for weeks that inflation was not abating at the consumer level but accelerating. It appears that some within this group just choose not to "get" it.
Wednesday's Child
Was full of woe. Equities were slapped around, but it was worse for Treasury debt securities.
Treasuries suffered a double whammy, as the likelihood for short-term interest-rate cuts anytime soon dissipated and interest waned for U.S. sovereign debt. By day's end, the U.S. 2-Year Note paid 4.98%. That yield was up 22 basis points for the day. The U.S. 10-Year Note paid 4.55%, up 18 basis points by day's end.
The entire yield curve took a beating as there now appears to be no path towards lower rates ahead of the national election without the central bank appearing to be overtly political in the process.
This morning, I saw Fed Funds futures trading in Chicago that showed a 66% probability for a first 25 basis point rate hike on September 18. A month and a half ahead of the election? I would not think so. That would be an attempt to pick sides politically.
These markets are now just barely pricing in 50 basis points worth of rate cuts (51% probability) for calendar year 2024. At this point, as I have said before, with inflation resurgent and the economy still growing, a 25-basis point rate hike should be under consideration as much as should any rate cut.
It has become abundantly clear that in this very liquid environment, created by irresponsibly loose fiscal policy, short-term rates are not restrictive enough to put all of the inflation that Congress forced upon the American consumer back in Pandora's box.
Do not make the mistake of blaming the Fed for this inflation. The Fed may have been a little slow to recognize the permanence of this inflation and may have enabled the federal government's badly managed attempt to sneak "modern monetary theory past the public disguised as fiscal policy, but the central bank is not the root cause. This persistently warm consumer-level inflation was and is the product of legislation.
Clueless Fed
I love this quote that I took from the Fed Minutes on Wednesday. I shared it with the crew at Doug's Daily Diary in real time and would like those of you who did not see it on Wednesday to see it. Check this out:
"In their discussion of inflation, participants observed that significant progress had been made over the past year toward the Committee's 2 percent inflation objective even though the two most recent monthly readings on core and headline inflation had been firmer than expected. Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year. Participants generally commented that they remained highly attentive to inflation risks but that they had also anticipated that there would be some unevenness in monthly inflation readings as inflation returned to target."
Residual seasonality? Like high energy prices due to war and the threat of the escalation of wars in progress in the Middle East and in Eastern Europe? I thought it at least fairly obvious by February that something more than mere seasonal force was impacting prices.
By the way, WTI Crude was up 1.2% to $86.26, despite the surge in the U.S. Dollar Index to 105.17 from 104.05 on Wednesday. That's right, prices from oil to a whole array of commodities have been rising in the face of a stronger dollar, not the easiest trick in the book to pull off. Probably seasonality.
This crew went to school for this. They probably even teach. Gee whiz.
Deep Dive Into Inflation
Any of you kids following the Atlanta Fed's model for "Sticky-Price" CPI? Yeah, it's not good.
For those that don't know or do not understand, economists at the Fed have separated a plethora of CPI components into two baskets. One basket, "flexible price" items include such things where price changes happen more rapidly and tend to be more volatile. These would be things like fuel, produce, used and new vehicles, lodging, apparel, jewelry, and tobacco, etc. The second basket is the "sticky price" group where prices move more slowly and tend to be less volatile. Obviously, at least in theory, this group will have an outsized impact on headline CPI over the long haul. That's a problem.
For March, according to Atlanta, sticky price CPI printed at growth of 4.5% year over year and has not printed below 4.4% for any month since January 2022. This group peaked at growth of 6.7% in December 2022, when headline CPI was 6.5%.
Now, for March, flexible price CPI landed at growth of just 0.8% year over year. Seems paltry, right? That's up from -0.2% in February and -0.9% in January. This group bottomed out at -3.5% in June of 2023 and apexed at a stunning 19% in March 2022 when headline CPI growth was 8.5%.
The fact is that flexible price CPI has placed downward pressure on headline CPI for every single month since December 2022. This is where most of the progress made on inflation has come from. Now, sticky price CPI has placed upward pressure on headline CPI for every single month starting with December 2022.
What I am telling you is that as far as fighting consumer-level inflation is concerned, the low-hanging fruit has been picked clean. Even if energy prices were not surging, hitting a 2% target would be difficult. About the only friend inflation fighters have right now is the stronger U.S. dollar, and that will hurt trade, which will ultimately pressure GDP.
Equity Markets
The S&P 500 gave up 0.95% on Wednesday, as the Nasdaq Composite surrendered 0.84%. The small-cap Russell 2000 was beaten severely, taken out to the woodshed for a loss of 2.52%. The Dow Transports were slapped around for 2.29%, the KBW Bank Index was pasted for 3.01% ahead of Friday's launch of Q1 earnings season, and the Philadelphia Semiconductor Index gave up 1.65% for the session, outperforming most other narrow or specialized equity indices.
Ten of the 11 S&P sector SPDR ETFs shaded into the red on Wednesday as seven of these funds gave up more than 1%. The REITs XLRE were obliterated at -4.04%. Energy XLE was the group's only winner at +0.35%.
Walmart WMT led the Dow 30 at +1.56% as Home Depot HD was the poorest performer among the 30 at -3.04%. Notably, among semiconductors, as equity markets sold off, traders returned to Nvidia NVDA as that name gained 1.97% on Wednesday.
Breadth, as you surely already know, was awful on Wednesday. Losers beat winners at the NYSE by about 6 to 1 and at the Nasdaq by roughly 7 to 2. Advancing volume took just a 17.7% share of composite-listed NYSE trade and a 28.6% share of composite Nasdaq-listed trade.
Aggregate trading volume did increase on a day-over-day basis, by 13% for NYSE listings and by 9% for Nasdaq listings. Does it count? Trade across the membership of the Nasdaq Composite finally exceeded its trading volume's 50-day simple moving average (SMA), so yes, it certainly does count.
Both the S&P 500 and Nasdaq Composite have now given up their 21-day exponential moving averages (EMAs). However, both still are yet to test their respective 50-day SMAs from above. We still need a "follow-through" day to confirm a semi-permanent change in trend. I would prefer it not come today but in a few days' time, so as not to fuse the two moves into one, thus muddying the technical picture.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 216K, Last 221K.
08:30 - Continuing Claims (Weekly): Last 1.791M.
08:30 - PPI (Mar): Expecting 0.3% m/m, Last 0.6% m/m.
08:30 - Core PPI (Mar): Expecting 0.2% m/m, Last 0.3% m/m.
08:30 - PPI (Mar): Expecting 2.3% y/y, Last 1.6% y/y.
08:30 - Core PPI (Mar): Expecting 2.3% y/y, Last 2.0% y/y.
10:30 - Natural Gas Inventories (Weekly): Last -37B cf.
13:00 - Thirty Year Bond Auction: $22B.
The Fed (All Times Eastern)
08:45 - Speaker: New York Fed Pres. John Williams.
12:00 - Speaker: Boston Fed Pres. Susan Collins.
13:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: KMX (0.46), STZ (2.09), FAST (0.53)
At the time of publication, Guilfoyle was long NVDA.
