Powell and the PPI
We continue to see expectation risk for tomorrow’s April CPI report.
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* Powell reiterates no rate hike is on the table, but the Fed needs more time to let policy work.
* We continue to see expectation risk for tomorrow’s April CPI report, keeping us on the sidelines for now.
The stock market has moved off its highs today following the initial reaction to comments from Fed Chair Powell that inflation didn’t make progress in recent months and the Fed needs to be patient and let its policy work. Powell also shared that he doesn't think the next rate move will be a hike, more likely a hold.
That tells us the Fed was not pleased with the warmer-than-expected inflation readings found in today’s April PPI data. We discussed those results in today’s video, but in a nutshell, both headline and core PPI accelerated meaningfully in April compared to their March figures. Core PPI also climbed to 2.4% on a year-over-year basis, up from 2.1% in March. The yield on the 10-year Treasury is little changed, and gold prices have traded up in response.
The CME FedWatch tool still shows a potential Fed first rate cut in September with probabilities showing a potential second rate cut in December. It sure looks to us like the market isn’t heeding Powell’s words, something it’s done more than a few times over the last several quarters. We’re not surprised because, as we suspected, the market is leaning more on what happens in the April CPI report tomorrow morning.
Despite what we saw in the April PMI price paid data, the April PPI report, and recent consumer inflation expectation data, the market consensus for tomorrow’s CPI data still shows the core inflation rate falling to 3.6% on a year-over-year basis from March’s 3.8% figure.
Headline CPI is also expected to dip to 3.4% from 3.5%. Much the way we saw risk to the upside in the April PPI figures, we see it as well for tomorrow’s CPI. Should those figures come in as we suspect they might, we could see further weakness in the market.
For that reason, we’ll sit on the sidelines and digest this afternoon’s Google (GOOGL) IO event. Based on tomorrow’s CPI report, an opportunity to dip into our shopping list later this week may present itself.
At the time of publication, TheStreet Pro Portfolio was long GOOGL.
