“Pressure is something you feel when you don't know what you're doing.” ~Chuck Noll

Good evening,

It was the second consecutive down week for the S&P 500, with much of the pressure on stocks this week originating from a hotter than expected CPI print, released on Wednesday. Core CPI came in hotter than Fundstrat’s expectations, as well as the Street’s. The MoM reading came in at +0.36%, the same as it was in February.

As Head of Data Science “Tireless” Ken Xuan noted during our weekly research huddle, “If you look at the details of this hot CPI print, the primary culprit is still car insurance, which is still surging at a 22% year-over-year rate, and as we’ve said before, that’s a lagging function of increases in auto prices.” In Xuan’s view, inflation is still tanking. “One number does not make a change in the trajectory of inflation,” he asserted.

That sparked a question from Head of Technical Strategy Mark Newton: “Hold on, you said one number,” Newton interjected, “but it’s really been three numbers, right? The last three CPI reports have been hotter. For January and March we pointed out seasonality factors and suggested that this was a short-term effect and the metrics would revert back. We are still seeing auto insurance boosting the numbers, but what about the other components?” 

Fundstrat Head of Research Tom Lee had an answer for that. He and his team took a deeper look at the data behind the latest CPI numbers, and while he acknowledged that “we didn’t get the CPI number we wanted,” he found that “the forces of disinflation are still strong. Right now we are seeing the highest share of CPI components with inflation of less than 3% YoY since 2021, and that share is expanding,” he told us this week. This is shown in our Chart of the Week:

In Xuan’s view, “I don’t think current inflation is as high as what the CPI shows. We saw headline PPI coming in softer,” on Thursday, he pointed out. That’s something Newton acknowledged, depicting it as a “silver lining” and a “breath of fresh air” for investors this week. 

Although the indices ended the week down, Newton said that “technically, we have seen a little bit of a short-term break in the market after a pretty sustained uptrend. I don't sense that this is going to be a big deal. My own thinking is that it's very short-term in nature.”

For Newton’s technical perspective on the markets, “The bigger deal is that interest rates and the dollar have spiked pretty dramatically in the last few days, and stocks are taking their cues from this.” 

Expounding on this, he noted, “When we look at the path of interest rates [10-year yields], we saw a meaningful breakout a few days ago – we had been sort of churning at 4.35 and now we’ve gotten up to 4.55. But my work suggests that the bigger move is still likely going to be to the downside, and I personally expect to see a pretty rapid decline in yields between the latter part of April until August [2024].”

Bringing the discussion full circle, Newton suggested that “To me, my work is very consistent with what Tom has been saying about the fact that we are still very much in a disinflationary trend and a lot of this is just time-distorted economic data that’s really not going to last. A look at the larger weekly cycle for rates, going back the last two decades, suggests that, if they decline as I expect, rates could be lower, really, until the early part of next year. So, on balance, I think what we’ve seen this week is kind of a fake move that should not last.”

Elsewhere 

The European Central Bank kept rates steady at 4%, extending its pause in rate moves to five months. ECB officials acknowledged progress on their fight against inflation, but, echoing their counterparts at the Fed, said they wanted to gain more confidence in a sustainable decline before moving to cut rates.

Taiwan Semiconductor Manufacturing Co. (TSMC) will make its most advanced semiconductors in a fabrication plant it is currently building in Arizona, partly through a $6.6 billion government incentive. Slated to come online in 2028, the $65 billion plant will make its cutting-edge 2-nm chips, helping to address national- security concerns about the semiconductor industry. Another TSMC plant in Arizona is scheduled to come online in 2025. 

Japanese Prime Minister Fumio Kishida visited the United States, addressing a joint session of Congress and taking part in a trilateral summit with President Biden and Philippine President Ferdinand Marcos Jr. PM Kishida and his wife were also guests at a state dinner in their honor. 

BlackRock (BLK 0.14% ) reported that assets under management hit a new all-time high of $10.5 trillion, bolstered by advances in the stock market and its new spot BTC ETF. At the same time, the company noted that net inflows came in below expectations, largely due to skepticism about equities. “There is still a record amount of cash on the sidelines, and money market fund balances are now approaching $9 trillion,” Blackrock CEO Larry Fink told analysts.

Morgan Stanley (MS 0.52% ) faces intensifying regulatory scrutiny of its wealth management business, as the SEC, the Office of the Comptroller of the Currency, and the Treasury join the Federal Reserve in asking questions about Morgan Stanley’s anti- money- laundering (AML) and Know Your Customer (KYC) controls. 

The AI chips of Nvidia (NVDA -1.10% ) got some new competition, as Google introduced Axion, a server chip developed using ARM (ARM) designs as part of the company’s effort to reduce its reliance on Nvidia (NVDA -1.10% ) and Intel (INTC -0.87% ). Speaking of Intel, the grand dame of semiconductor companies unveiled its latest AI chip, Gaudi 3, which Intel claims is 1.5x faster and twice as power-efficient as Nvidia’s H100. Another Nvidia customer, Meta (META -0.41% ) also unveiled an in-house AI chip this week, internally known as Artemis.  Other major providers of cloud- computing services, such as Amazon and Microsoft, are also working to develop in-house chips.

Simon Harris became Ireland’s new taoiseach, or prime minister, following the surprise resignation of Leo Varadkar on March 20. Harris, 37, is the youngest taoiseach ever. (The previous youngest ever was Varadkar, who was 38 when he ascended to the position in 2017.)

A diplomatic crisis arose between Mexico and Ecuador after Ecuadorian law enforcement forced their way into the Mexican embassy in Quito to arrest Jorge Glas, the former Ecuadorian vice president who had been seeking political asylum there after being convicted for corruption. Mexico has asked the United Nations to expel Ecuador for its actions, which have drawn widespread criticism around the world. And finally: Avi Wigderson has won the 2023 Turing Award, the most prestigious honor in the field of computer science. Wigderson is known for his work showing that the introduction of artificial randomness into algorithms can improve their effectiveness in solving real-world problems, as well as his role in developing the “zero-knowledge proof” – research that has been central to the development of cryptography and cryptocurrencies. With this award, Wigderson, an alumnus of and a mathematics professor at Princeton University, became the only person to win both the Turing Award and the Abel Prize, regarded as the Nobel Prize of mathematics.