Morning Roundup

By Mark Masterson on May 14, 2024

Good morning,

Below are the news items moving markets today:

Executive Summary:

Well – the first of two important inflation data points is out and it continues the trend of higher than expected inflation…..

• PPI higher than expected. 
• Final 0.5% m/m vs 0.3% exp
• PPI Core 0.5% m/m vs estimates 0.2%
• US Producer Prices increased 2.2% over the last year, the highest PPI reading since April 2023.
• PPI inflation is now up for 3 straight months for the first time since April 2022.

Take a look.  Clearly PPI has curled higher.

This will make it difficult for the Fed to cut rates any time soon.

Perhaps more important is the CPI data due tomorrow.

We may get some comments from Powell today.  He speaks at 10 a.m. 

• *FOMC MEMBER COOK (TUES. 9:10AM)
• *FED CHAIR POWELL (TUES. 10:00AM)
• *FOMC MEMBER BOWMAN (WED. 3:20PM)
• *FOMC MEMBER BARR (THURS. 10:00AM)
• *FOMC MEMBER MESTER (THURS. 12:00PM)
• *FOMC MEMBER BOSTIC (THURS. 3:50PM)
• *FOMC MEMBER WALLER (FRI. 10:15AM)

Yellen has been outspoke as of late as well. 

Yesterday she said this…..

• YELLEN: HIGHER INTEREST RATE PATH WORSENS FISCAL CHALLENGE 

Perhaps Janet is sending a message to Powell……Please Jay – cut rates soon.

She also said this…..

• US TREASURY SECRETARY YELLEN: TAX REVENUES SHOULD BE USED TO LOWER THE DEFICIT.

Well – yes that is true.  The problem is, the deficit is growing so much faster than tax revenues that they can’t keep up.

Great chart from the Northmantrader showing how each and every time the VIX (Fear index) rises as markets sell-off, Yellen comes out and tells the markets she is “concerned.”  The algo’s immediately respond by sending the market higher and VIX lower as expectations for more liquidity get priced in.

VIX

Northmantrader.com 5 14 24

Investors are not showing any fear.  In fact, a recent BofA survey shows investors most bullish since 2021 despite stagflation overhang:

• BofA’s latest Global Fund Manager survey said investors most bullish since Nov-21, noting stock allocations highest since Jan-22 and FMS cash level of 4.0% lowest since Jun-21.
• However, team cautioned risk assets now more vulnerable to stagflation as report noted global growth expectations fell for first time since November with net 9% expecting weaker economy over next 12 months, a 20 point swing m/m, though soft landing expectations ticked up 2bp to 56% (though well off January 71% peak).
• While higher inflation remains biggest tail risk, report also showed showed growing optimism on rate cuts and falling inflation.
•  Long Magnificent 7 most crowded trade for 14th straight month, followed by long dollar.
• Survey comes as market has slowly rebounded in recent weeks back toward record highs amid wait for more signs of disinflation traction and clarity on Fed rate cut path.
• However, strategists continue to flag higher-for-longer overhang, while JPMorgan strategists argued earnings expectations have run ahead of economic momentum.

As if we need more signs of too much liquidity in the system – the meme stock rage is back…..

• GameStop, AMC surge 40% in premarket trade as meme stock rally pushes higher (Bloomberg, FT, Bloomberg)

Articles of Interest:

• Markets:
  • BofA’s May fund survey highlights rate cut bets have made investors most bullish since November 2021 (Reuters)
  • China stocks stage rally but global funds remain unconvinced with earnings growth, economic recovery seen key (Bloomberg)
• Economy:
  • SF Fed study says corporate price gouging not primary driver of US inflation (Reuters)
  • Wall Street economists warn US recession could trigger debt crisis (link)
• Central banks:

• Latest Reuters poll shows two-third of economists think Fed will cut starting in September (Reuters)
• BoE chief economist Pill sees rate cut possible over summer; says labor market remains tight (Reuters)

• Corporate:
  • Walmart said to be cutting hundreds of corporate jobs and asking some staff to move to large corporate hubs (link, Bloomberg)
  • As banks retreat from commercial property lending, big-name funds step in, betting real estate prices have bottomed (Reuters)
• Geopolitics:
  • Biden to impose tariffs on Chinese semiconductors, critical minerals and EVs (Axios, Bloomberg)
  • Fighting between Israel and Hamas intensifies across the Gaza Strip (Reuters)
  • Blinken arrives in Kyiv as Russia takes more territory as Russia captures more territory in Ukraine (Axios, FT, Reuters)
  • Yellen hopeful China won’t mount ‘significant’ trade retaliation after EV tariff increase (Bloomberg)

Charts of the day:

There may be some opportunities brewing away from the Mag 7 names.

We have highlighted international stocks.

As you can see, the US has experienced an extended period of outperformance over Asian and Europe, as well as the rest of the world.

These trends don’t tend to last this long without some reversion back to the mean.

The stats:

• All US stocks are now worth 187% of US GDP, and the rest of the world’s equities are worth only 61% of World GDP ex-US.

Is this difference in valuation justified? (Charts via Goldman)

Goldman Sachs 5 14 24

Don’t look now, but even real estate may be setting up for a bounce soon.

Fund Managers massively underweight Real Estate.  These types of extremes can often market lows or bottoms.

Bank of America 5 14 24

Quote of the day:

“The unexamined life is not worth living.”      

― Socrates