NEW: Section (above) added identifying Key Recommendations and Super Grannies
April Core PCE came in “hotter” than expected at 0.40% MoM vs Street 0.3%. That is a “hot print” and, at face value, should have triggered a re-pricing of Fed funds expectations (June hike into play) and higher interest rates.
- Instead of a major de-risking, equity markets are up 1%. As our very own @mattcerminaro points out on twitter, this is a best case scenario. We have 3 reasons why we believe equity markets are reacting positively to this inflation report.
- First, 3 items drove 66% of rise on April Core PCE MoM:
– Financial Services +11bp <– due to Fed hikes itself!!!
– Housing +9bp <– we know where this is 2H23
– Used cars +7bp <– do we really believe?
Total +27bp or 66% of inflation - That means 0.27% of 0.41% or 66% rise is due to those 3. I would say this seems like a distortion and core PCE more like 0.13% MoM, or ~2%. And this implies future inflation should be cooling.
- Second, 69% of Core PCE (ex-housing) now has 3M annualized (aka SAAR) inflation <5%. What is the 65-year average? 69.5% (see below). This suggests to us that inflation internals are back to pre-pandemic trends. And this implies future inflation should be cooling.
- Third, U Mich final May 1-year inflation was released and came in at 4.2%, down 30bp from mid-month and from April final. Recall, the April surge rattled the Fed and investors, who cited this as a sign inflation is accelerating. Instead, as we highlighted last month, surges of 100bp in this series are often “flukes” and reverse. This is the case and shows consumer inflation expectations are trending lower.
BOTTOM LINE: Markets were positioned for a “hot CPI” and anticipated sizable sell-off.
All in all, this is an example of “not great” data but a positive market reaction.
- We do not see this as irrational, but highlights that consensus was bearishly positioned.
- Markets tend to climb a wall of worry and there is plenty on the plate:
– debt ceiling
– hawkish Fed
– regional bank turmoil
– hot inflation prints - But we think markets are also becoming forward looking. Fed funds futures didnt budge. There are 3 reasons (and more) to see future disinflation in today’s report (see above) which keeps Fed on “pause”
- We stick with our existing sector themes and stock recommendations:
– OW FAANG/Tech, Industrials Energy
– We remain OW our Granny Shots (34 stocks below) and the 5 super grannies - And we continue to see S&P 500 more likely to exceed 4,200 (struggling now) and rise towards 4,750 by YE.
HAVE A WONDERFUL MEMORIAL DAY WEEKEND!!!
Fed funds rates expectations did not even budge today
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This is the best case scenario for today
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ACTUAL IS BETTER THAN APPEARS: 3 items were 66% of PCE rise
As we noted above, 3 items drove most of PCE rise
PCE DIFFUSION: 69% of PCE items <5% inflation, in line with 65 year average
This is one of the strongest arguments for why inflation is set to cool. As below shows, 69% of PCE bucket is <5% 3M SAAR inflation.
- housing is not in this and that is >25% of bucket
- once housing rolls over, this jumps to >80%
- this is why we see future disinflation
UMICH INFLATION: April was the fluke
U Mich May final 1-yr inflation expectations by consumers fell to 4.2% reversing the spike last month to 4.5%. At that time, we highlighted prior surges over 100bp were often flukes and soon reversed. This looks like the case and not the “re-acceleration” of inflation many bears argued.
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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here
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