May 13, 2024 | CPI Preview

MARKETS

S&P 500: Up +3 points to 5227, VIX: 13.32

Asia: Japan -0.13%, China -0.21%, Hong Kong +0.80%

Europe: Euro Stoxx 50 -0.19%, FTSE -0.22%, DAX -0.22%

FX: USD (DXY) down 0.10%, EUR up 0.19%, GBP up 0.24%, JPY down 0.26%, CNY down 0.08%

Energy: WTI Crude up 1.02% to $79.06, Brent up 0.69% to $83.33

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal down ~4bp at 136bp, 5/10 yield spread -2bp

Treasuries: 2-year yields down ~2bp at 4.848%, 10-year yields down ~1bp at 4.485%, 30-year yields down ~1bp at 4.629%

WHAT WE'RE THINKING

Snapshot: US equities are mixed after the S&P 500 (SPX) gained +1.8% last week to close just ~60bp below the all-time record set in late March. The equal-weight S&P 500 (SPW) and small-cap Russell 2000 (RTY) outperform this morning.??Tech is the upside standout as AAPL rallies on reports that it’s nearing an iPhone deal with OpenAI. The same headline weighs on shares of GOOGL and META this morning.??Previously disliked YTD laggards like WBA, INTC, TSLA and ENPH catch a bid along with meme stocks like GME and AMC.??Previously popular/more crowded names like AMZN, MSFT, ANET and SMCI underperform with YTD Med Tech winners SYK, BSX and ISRG also lagging. Treasury yields are slightly lower across the curve.??The Dollar Index?is lower despite more weakness in yen. Gold is down ~1%, while US natural gas, copper and crude trade higher.?

• Markets are mostly in a holding pattern ahead of US inflation data that starts with tomorrow’s PPI and Wednesday’s CPI report.??
• Today’s NY Fed consumer inflation survey resulted in higher year-ahead expectations of +3.3% from +3% last month. Five-year inflation expectations also ticked higher with the report aligned with the lower growth/higher inflation message in Friday’s University of Michigan survey.??
• Fed officials Mester and Jefferson are scheduled to speak later today.??
• In addition to PPI/CPI, this week also brings April retail sales, the NAHB housing market index, Empire Fed manufacturing on Wednesday and Philadelphia Fed on Thursday. Weekly jobless claims on Thursday will also attract attention given last week’s higher-than-expected print.??
• Weekend data out of China was disappointing with bank lending and money supply well short of expectations, while PPI deflation worsened.??
• This week brings AI events from OpenAI (today at 10am PT) and GOOGL (I/O conf. tomorrow) with April-end earnings updates from AMAT, CSCO, DE, HD, LOW, ROST, TGT and WMT also in focus. This is also a busy week for sell-side industry conferences covering Health Care, Transports, Industrials, Energy and Media/Comm Services.? ??

PPI: Consensus is looking for April headline PPI to rise +0.3% MoM and +2.2% YoY, while core PPI is expected to rise +0.2% MoM and +2.3% YoY.??CPI is a much bigger input for markets, but tomorrow’s PPI print could provide early direction.??

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CPI: Consensus is looking for headline CPI to rise +0.4% MoM and +3.4% YoY with core CPI expected to rise +0.3% and +3.62%. The market has fixed the price index higher over the last few sessions that aligns with an unrounded +0.33% MoM gain. The more hawkish recent pricing skews risk/reward to the upside with any sequential decline in the MoM core rate from +0.4% in March generating upside.??On an unrounded basis, we see core CPI coming in at +0.28%, which would correspond to a +3.61% YoY rate.?

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Unprofitable growth: An unchanged core rate of +0.4% would generate some downside in the SPX with unprofitable growth stocks hardest hit. Unprofitable growth stocks have become more sensitive to inflation, interest rates and bond yields because higher borrowing costs make it more difficult to turn profitable. Stocks with the longest expected path to profitability would experience the greatest downside from a hotter-than-expected print.??Longer-term, high levels of fiscal spending have created an unfavorable supply/demand dynamic in the bond market, which should keep 10-year yields higher for longer.??A core CPI print that matches our expectation would likely provide a brief relief rally for unprofitable growth that we’d fade longer-term.??We see the 10-year yield staying near 4.5% over the next month with a target of ~4.15% by the end of Q2.??Unfortunately, the increased Treasury issuance we expect will likely keep the 10-year from falling below 4% through YE ’25.??

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Fed: The Fed uses the YoY rate of core PCE as its primary measure of inflation.??YoY core PCE has a better chance of declining over the next two months than it has in H2 due to base effects.??There are good reasons to expect a sequentially lower pace of core PCE inflation in H2, but the YoY rate will likely remain in the 2.6%-2.7% range.??That kind of outcome could result in one or two Fed rate cuts this year, but that’s about it.?

FACT OF THE DAY

Every strand of corn silk connects with an individual kernel of corn.?

JSC IN THE MEDIA

Arm Holdings (ARM) is Not a Beneficiary of A.I. Right Now: Although ARM fell following underwhelming F25 revenue guidance, Andrew highlights how the company is on track to ultimately benefit from increased demand for accelerated compute and A.I. workloads. Watch Video

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Macro Outlook and Mega Cap Tech: Andrew Graham joins Oliver Renick to discuss the outlook for mega cap tech and inflation, as well as Alphabet (GOOGL) and the A.I. race. Watch Video

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What do Advisors see for 2024? Speaking as one of five featured advisors on Barron’s Advisor Q&A, Andrew explores why we’d see a pull-back to start the year and predicts small-cap stocks will outperform large-caps for the year. Read on Barron's

See more of JSC in the Media.

THIS DAY IN HISTORY

May 13th, 1960: A Swiss expedition led by Max Eiselin reached the summit of Dhaulagiri (26,795’) in the Himalayas, without oxygen.

CATALYST CALENDAR

Tomorrow: 1) US PPI for April; 2) Google’s I/O developer conference 3) Finland’s CPI for April; 4) UK jobs numbers for March; 5) India’s wholesale prices for April; 6) German ZEW survey for May; 7) Earnings before the open: BABA, HD, IGT, JACK, ONON, Tencent; 8) Earnings after the close: NXT

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Wednesday: 1) US CPI for April; 2) US retail sales for April; 3) Sweden’s CPI for April; 4) Eurozone GDP for Q1; 5) Eurozone industrial production for March; 6) Empire Manufacturing index for May; 7) Japan’s GDP for Q1; 8) Australia’s jobs data for April; 9) NAHB housing survey for May; 10) Earnings before the open: DOLE, DT, MNDY, SRAD; 11) Earnings after the close: CSCO

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Thursday: 1) US building permits/housing starts for April; 1) Weekly jobless claims; 3) Philadelphia Fed survey for May; 4) US import/export prices for April; 5) US industrial/manufacturing production for April; 6) China’s retail sales/industrial production/FAI for April; 7) Earnings before the open: BIDU, DE, GOOS, JD, MNRO, NICE, UAA, WMS, WMT; 8) Earnings after the close: AMAT, DOCS, DXC, FLO, TTWO

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Friday: 1) US Leading Index for April; 2) Earnings before the open: RBC

Jackson Square Capital produces Inside Markets. We also offer financial planning and investment management services. Learn more here and catch up on our recent media appearances.

Investment Advisory Services offered through Jackson Square Capital, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

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