NEW: Notice new section (below): added so you can see our tactical ideas
The April Core CPI came in at 0.41% MoM, inline with consensus 0.4% and better than the feared “hot” figure clients were bracing for. But today’s release was not a tie breaker, either.
- Foremost, we think this report is good enough to keep the Fed in “pause” mode, meaning, we do not expect a June hike. The bar to hike, as we noted previously, has been raised because of the spreading ripples of the regional bank crisis. And today’s report did not warrant raising the probability of a hike in June.
- Fed funds futures fell across the board. The odds of a June hike fell to 1% today from 12% yesterday. And about 10bp has come out of the December 2023 forecast. In other words, this report added incrementally to the “Fed is done” camp.
- Most significantly, 40% of the CPI basket (by weight) is in outright deflation. This is a huge development:
– Diffusion was 33% in March, big jump in April
– 10-yr average is 38%, so this shows inflation certainly cooling
– Housing and Food are not “deflating” even though real-time measures show they are
– That would add another 50% or so when they do - The entire 0.41% increase in Core CPI MoM was due to 3 components:
– Shelter ex-hotels +0.23
– Used cars + trucks +0.14
– Vehicle insurance +0.04
That’s it. Without these, overall Core CPI MoM would have netted to 0.0% - The anomaly in this report, in our view is the jump in used car prices which rose 4.45% MoM and was the largest swing of components (see below):
– Manheim used car prices dipped -3.1% in April, one of largest declines
– New car average incentive now $1,714, highest in 1 yr
– Supply chain tightness is essentially gone - So while cars are showing elevated/rising prices, this seems like residual drags and not forward implications. In fact, should be lower. Similarly, housing is still accelerating reaching +8.24% YoY, but we know this is also a statistical lag.
- The bond market also saw this as tilting dovish as 2-yr yields are down 8bp to 3.939%, reversing 4 days of rising yields. And this ties back to our statement that this report was below the “hot” threshold to warrant pricing in higher odds of a June hike.
STRATEGY: Still a game of inches… but bullish factors incrementally gained today
But markets have become a “game of inches” (from Any Given Sunday 1999) and each incoming data point barely moves consensus viewpoints. But as noted above, today’s report is not a tie breaker, there are signs of progress on inflation, but then again, there is the same volatility in components that would argue inflation is lingering.
But overall, we see the ground gained by those bullish:
- 2-yr yields fall = valuation support
- Fed odds of a June hike fall to 1%
- 3 components drove entire April MoM 0.41% rise in core CPI
- Used cars as a commodity is a huge contributor, but is set to fall, same with housing
- PPI coming out Thu and will be key
In our view, the most significant aspect of this April CPI report is below.
- 40% of the CPI basket (by weight) is in outright deflation. This is a huge development
- Diffusion was 33% in March, big jump in April.
- 10-yr average is 38%, so this shows inflation certainly cooling.
- Housing and Food are not “deflating” even though real-time measures show this. That would add another 50% or so when they do
3 components drove the entire rise in April Core CPI MoM….
2-yr yield fell, reversing 4 days of gains. This is good.
Odds of a Fed hike in June fell to 1% from 12% yesterday. The bar to resume hikes remains high.
3 categories show the most acceleration:
- Used cars surged, but we see this as temporary and Manheim shows this will fall
- Shelter rose again but this is also lagging and we don’t see housing accelerating YoY gains to 8.24%, even if this is what CPI is showing
As @LizAnnSonders notes, used car prices tanked in April
And @GuyDealership notes that vehicle incentives are at 1-yr high
