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Inflation Runs Hot (Again) in May



Chief Market Analyst

The S&P 500 is 3-for-3 this week in teasing investors with the prospect of closing at a new record high, but failing to do so. It has been a remarkably choreographed flirtation, too.

The first step calls for an opening challenge of the May 7 record closing high (4232.60). The second step calls for a step back after venturing into record ground. The third step calls for a sideways slide after the step back. And the fourth, and final, step is another step back below the record closing high.

It’s been a bit like the electric slide dance done at weddings. You move forward, you move back a few steps, you turn, you slide, you clap your hands, and when the song ends, you’re sometimes facing a different direction from where you began, but you haven’t ultimately gone anywhere.

The futures market was doing its own version of the electric slide ahead of the May CPI report today.

The S&P 500 futures were roughly flat going into that report, having digested the ECB’s decision to leave its main policy rates and pandemic emergency purchase program unchanged, as expected, but they are now modestly higher following a CPI report that was hotter than expected and an initial claims report that was a little weaker than expected.

To be specific, the S&P 500 futures are up nine points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 32 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 154 points and are trading 0.5% above fair value.

In terms of the CPI report, total CPI increased 0.6% month-over-month in May ( consensus 0.4%), with a 7.3% increase in the index for used cars and trucks accounting for about one-third of that increase. Core CPI, which excludes food and energy, jumped 0.7% ( consensus 0.4%).

On a year-over-year basis, total CPI was up 5.0% (vs. 4.2% in April), which was the largest increase since August 2008. Core CPI was up 3.8% year-over-year, which was its largest increase since June 1992!

The key takeaway from the report, aside from it showing broad-based price increases, is that one can see the potential for stickier inflation looking at just the last six months when pandemic base effects weren’t fully depressed. To wit, total CPI is running at an annualized rate of 5.8% over the last six months while core CPI is running at an annualized rate of 4.0%.

In any case, it certainly raises questions as to why the Federal Reserve continues to maintain a pace of buying at least $120 billion per month in Treasury and agency mortgage-backed securities. We suspect today’s data will spark a more involved discussion at next week’s FOMC meeting about a potential tapering plan.

The same can be said about the initial claims data. Granted it was a bit weaker than what economists expected, yet the improved trend is undeniable.

Initial claims for the week ending decreased by 9,000 to 375,000 ( consensus 365,000), lowering the four-week moving average by 25,500 to 402,500. Continuing claims for the week ending May 29 decreased by 258,000 to 3.499 million, lowering the four-week moving average by 35,250 to 3,651,250, which is the lowest since March 28, 2020.

The key takeaway from this report is that the trends are moving in a manner that reflects an economy that is moving with increased reopening vigor.

The 10-yr note yield, which danced around 1.48% in the early overnight hours, is up four basis points from yesterday’s settlement to 1.53%. There has also been some selling of shorter-dated securities, which are more sensitive to changes in the fed funds rate.

Overall, this morning’s data was supportive of the reopening trade, which is why one might expect to see some relative strength in the value/cyclical areas of the market at today’s open.

We’ll then have to see if the stock market finds a new step or if it keeps dancing the electric slide.

Originally Posted on June 10, 2021 – Inflation Runs Hot (Again) in May

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