Powell Covers for Hot Numbers

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KR Opinion

Tuesday's release of the Producer Price Index (PPI) showed a headline increase of 0.5%, higher than the expected 0.3%. Year-over-year, the figure also exceeded expectations. Despite this, the markets seemed to shrug off the news.

As I mentioned in last night's newsletter, I anticipated Powell would downplay any negative impact, which he did during his live comments about half an hour after the equity markets opened. Powell dismissed the hotter headline numbers, noting that previous reports had been revised downward, thus reducing their impact.

However, as I discussed in my YouTube video tonight, the headline PPI number is climbing again. I expect a 0.5% to 0.75% increase in the next two to three CPI and PPI reports. While the markets accepted Powell's comments that the report was mixed and not overly hot, inflation will continue to rise.

Powell admitted that he had little confidence in the numbers remaining stable or flattening, even though he denied the possibility of a rate hike. Looking ahead to Wednesday's opening, we will get the CPI report, expected to show a 0.4% increase and year-over-year numbers anticipated at 3.6%.

This suggests a potential drop in the year-over-year figure, but I expect it to remain the same or slightly higher. With prices staying firm to higher, this number will likely increase.

My broader expectation is for inflation to rise through the summer, experiencing an "echo bounce," where we see a steep decline in inflation rates followed by a rebound. This pattern might continue until late 2024 or early 2025. We will also see the retail sales report, which is expected to show a 0.2% increase.

If this comes in higher, it could affect market sentiment slightly. However, algorithms still suggest an upward bias for equity markets, and we can expect some volatility in treasuries. More on this later.

Looking Back on Tuesday’s action

The stock market ended the session positively, with major indices closing at or near their highs. The Nasdaq Composite reached a new all-time closing high, while the S&P 500 finished within ten points of its record close.

The Russell 2000 outperformed, gaining 1.2% today, partly driven by another meme stock rally. GameStop (GME 48.75, +18.30, +60.1%) and AMC Entertainment (AMC 6.85, +1.66, +32.0%) both surged over 100% at one point before some profit-taking. The Russell 2000 is the best-performing index this month, up 5.7%.

Major indices traded mixed for most of the session as participants assessed the April Producer Price Index (PPI) data. The headline inflation readings were higher than expected, with total PPI and core PPI rising 0.5% month-over-month, compared to the anticipated 0.3% and 0.2%, respectively. However, significant downward revisions to last month's readings tempered the market's response.

Fed Chair Powell described the data as "quite mixed" during a discussion at the Foreign Bankers' Association's annual meeting. The Treasury market saw immediate selling pressure following the PPI release but quickly reversed, ending with gains ahead of tomorrow's Consumer Price Index report at 8:30 ET. The 10-year note yield rose from 4.48% to 4.52% after the release but settled at 4.45%.

Stocks rallied in the afternoon, boosted by Alphabet (GOOG 171.93, +1.03, +0.6%), which saw a sharp increase after announcing new AI features at its developers conference. Other mega-cap stocks also rose alongside Alphabet, lifting the broader market.

In corporate news, Dow component Home Depot (HD 340.50, -0.46, -0.1%) faced a negative reaction to its earnings report due to disappointing sales.

Eight of the 11 S&P 500 sectors ended with gains, led by information technology (+0.9%) and real estate (+0.7%). The consumer staples sector was the weakest performer, with a 0.2% gain.

·S&P 500:+10.0% YTD

·Nasdaq Composite: +10.0% YTD

·S&P Midcap 400: +8.6% YTD

·Dow Jones Industrial Average: +5.0% YTD

·Russell 2000: +2.9% YTD

Reviewing Tuesday’s Economic Data Releases:

- April NFIB Small Business Optimism: 89.7 (KR Forecast consensus 88.9); Prior 88.5

- April PPI: 0.5% (KR Forecast consensus 0.3%); Prior was revised to -0.1% from 0.2%

- April Core PPI: 0.5% (KR Forecast consensus 0.2%); Prior was revised to -0.1% from 0.2%

The key takeaway from the report is that nearly three-quarters of the increase in final demand prices was due to a 0.6% rise in the index for final demand services. This development undermines the Fed's confidence that inflation is on a sustainable path to its 2% target.

Wednesday's economic calendar includes:

- 7:00 ET: Weekly MBA Mortgage Index (prior 2.6%)

- 8:30 ET: April CPI (KR Forecast consensus 0.4%; prior 0.4%), Core CPI (KR Forecast consensus 0.3%; prior 0.4%), April Retail Sales (KR Forecast consensus 0.4%; prior 0.7%), Retail Sales ex-auto (KR Forecast consensus 0.2%; prior 1.1%), and May Empire State Manufacturing Index (KR Forecast consensus -9.0; prior -14.3)

- 10:00 ET: March Business Inventories (KR Forecast consensus 0.0%; prior 0.4%) and May NAHB Housing Market Index (KR Forecast consensus 51; prior 51)

- 10:30 ET: Weekly crude oil inventories (prior -1.36 million)

- 16:00 ET: March net long-term TIC flows (prior $71.5 billion

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