US inflation data gave investors a good reason to cheer up yesterday. The headline number fell more than expected to 4%, and core inflation met analysts’ expectations at 5.3%. The biggest takeaway from yesterday’s CPI report was, again, that easing in inflation was mostly driven by cooling energy prices, but shelter costs remained sticky – up by more than 8% on a yearly basis. Yet because these shelter costs represent more than 40% of the core CPI, and private sector data is pointing at cooling housing costs, investors didn’t see the sticky core inflation as a major issue. The producer price inflation data is due today, before the Federal Reserve’s (Fed) policy decision, but the latter will unlikely change expectations for today’s announcement. A softer-than-expected PPI number – due to soft energy and raw material prices, could, on the contrary, further soften the Fed hawks’ hand.
In numbers, the expectation of a no rate hike at today’s decision jumped past 90%, while the expectation of a no rate hike in July meeting rose from below 30% to above 35%. The S&P500 extended its advance to 4375, while Nasdaq 100 rallied past the 14900 level. Small companies followed suit, with Russell 2000 jumping to the highest levels since the mini banking crisis.
Tough accompanying talk?
The Fed’s decision for today is considered as done and dusted with a no rate hike. But the chances are that Fed Chair Jerome Powell will sound sufficiently hawkish to let investors know that the war is not won just yet, because 1. Core inflation remains well above the Fed’s 2% target, 2. US jobs market remains too strong to call victory on inflation, and 3. Equity valuations point at an overly optimistic market, at the current levels, the S&P500 trades at around 18 times its earnings forecast over the next year, and these levels are typically associated with times of healthy economic growth and rising corporate profits. But we are now in a period of looming recession odds, and falling profits.
Ouch, BoE
Yesterday’s jobs data in Britain printed blowout figures for April and May. The employment change rocketed to 250K in April, while the expectation was a fall from 180K to 150K. The unemployment rate unexpectedly dropped to 3.8%, and average earnings excluding bonus rose from 6.8% to 7.2%. Then, the jobless claims fell by more than 13K – while analysts expected a surge of more than 20K – hinting that the British job market will likely print solid figures for May as well.
While these are excellent news for Brits who could at least see their purchasing power partly resist to the terrible cost-of-living crisis – where eggs, milk and bread for example saw their prices rise by a whooping 30-and-something per cent, it makes the end of the BoE tightening look impossible for now.
The market prices in another 125bp hike this year, which will take the British policy rate to 5.75%, and there is around 20% chance for an additional 25bp by February next year.
And all this in a market where mortgage rates rise unbearably, and house prices tumble. The 2-year gilt yield took a lift yesterday and is preparing to flirt with the 5% mark. We are now at levels above the mini-budget crisis of Liz Truss, while the spread with the 10-year yield is widening, suggesting that the UK economy will hardly come out of this unharmed. On top, the FTSE 100 index has fallen well behind the rally recorded by the US and European stocks this month because of falling energy and commodity prices due to a disappointing Chinese growth. The only good news for the Brits is that the pound is being boosted by hawkish BoE expectations. Cable rallied past the 1.26 level and is slowly drilling above a long-term downtrending channel top. The trend and momentum indicators remain tilted to the upside, and the divergence between the Fed – preparing to call the end of its tightening cycle sometime in the coming meetings, and the BoE – which has no choice but to keep raising rates – remains supportive of further gains in Cable. We could see the pair regain the 1.30 level, last seen back in April 2022.
China cuts
The People’s Bank of China (PBoC) lowered its 7-day reverse repurchase rate by 10bp to 1.9% yesterday, a week after asking the state-run banks to lower their deposit rates. These are signals that the PBoC is preparing to lower its one-year loan rate tomorrow to give a jolt to its economy that has been unable to gather a healthy growth momentum after Covid measures were relaxed by the end of last year.
Copper futures jumped above their 200-DMA yesterday, though they remain comfortably within a broad downtrending channel building since the second half of January, while US crude rebounded from a two-week low yesterday but remains comfortably below its 50-DMA.
Final word
Because the rally in tech stocks now looks overstretched and China is getting serious about boosting growth, we will likely start seeing investors take profit on their Long Big Tech positions and return to energy and mining sector to catch the next train which could be the one that leads to profits on an eventual Chinese reopening.
