THIS INTRADAY ALERT IS SENT SOLELY TO CLIENTS OF FS INSIGHT
Equites are selling off >1% today (IWM -0.03% off >3%) after Jan CPI came in “hot” vs consensus with Core CPI +0.39% (vs consensus +0.30%). Is this an over-reaction? Yes. Should investors buy this dip? Yes. We think this is still too early to “call the top” for 1Q2024. Let me explain:
- The bond market is selling off sharply (yields up) with 10-yr yields now 4.285%, and way up from 3.865% just a week ago. And post this CPI report, we are hearing some economists/pundits suggest the Fed could even further delay rate cuts because of today’s report.
- In our view, this is an over-reaction to a singular CPI print. And the stock market reaction is also overdone as well. Why?
- Foremost, there are really 4 culprits behind today’s “hot” CPI:
– Shelter accelerated –> OER sticky, but not forever
– Auto insurance accelerated –> surging, but not forever
– Misc personal svcs –> stock surge = fincl svcs CPI surge, not forever
– Hospital Services surge –> we flagged, not sure what’s behind this
– 3 of 4 culprits not really stuff that “scares Fed now” but are lingering issues - Renaissance Macro posted an X (tweet?) highlighting that OER (owner’s equivalent rent) surged higher to 6.94% YoY while “rent of primary residence” fell to a pace of +4.44% YoY. They highlight this is an unusual divergence. Further, if supply of housing is the constraint, keeping policy tight magnifies issue.
- As for the other 3, we have talked exhaustively about this catch-up of auto insurance and the YoY growth rate continues to accelerate (now 20.6% yoy vs 20.3% last month). Financial services CPI rose because of higher stock prices.
- We do not think the downward trajectory of inflation has been halted. Core CPI is still tracking lower and there is noise in today’s report. Consider the following:
– Core CPI MoM Jan –> +0.39%
– Shelter CTG –> +0.26%
– Auto insurance CTG –> +0.05%
– Core CPI ex-both –> +0.08%, or +0.96% annualized
– CTG stands for “contribution to growth” - Just ex-those 2 items, CPI is annualizing at 1%. It is still falling like a rock.
- We also think it is too early to “call a top” in the near-term. Mark Newton, Head of Technical Strategy, noted in many recent comments that market is showing overall strength. And breadth has indeed been improving.
- But more telling, in our view, is the still low level of NYSE margin debt. These figures need to surge to mark a near-term top:
– current level is $700 billion (end of Dec)
– recent peak was $710 billion (Jul 2023)
– Jul peak was followed by -11% drawdown in stocks - There is just too much dry powder on the sidelines. Thus, we think this sell-off dip will be bought. The next key data points are:
– U Mich inflation expectations mid-Feb on Friday 2/16
– Nvidia reports quarterly results 2/21 (NVDA 2.08% )
Bottom line: We think it is too early to call a top for 1Q24. We are watching for a top, but this sell-off seems too consensus.
- we would look for a top to be more of a “stocks sell off on good news”
- meaning, we get a great macro data point, and stock sell off
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