“You only go around once, but if you play your cards right, once is enough.” ~Frank Sinatra

Good evening,

When stocks rose the week of May 6-10 despite a dearth of macroeconomic data being released, Fundstrat Head of Research Tom Lee saw this as a sign that investors had de-risked to such an extent in April that they now needed to re-risk. Lee further argued that, once they resumed, macroeconomic data releases would serve as a catalyst for further gains in stocks.

This week, the Nasdaq and the S&P 500 hit new all-time high closes, and the Dow breached the 40,000 milestone for the first time (closing the week at 40,003.59). Arguably the biggest driver of this week’s rally was what Fundstrat Head of Research Tom Lee had described as not just the most important of this week’s macro data, but “one of the most important of 2024” – April CPI. 

Ahead of the data release, Fundstrat Head of Data Science Ken Xuan’s model saw Core CPI MoM coming in at 0.29%, ever-so slightly below Street expectations of 0.30%. Lee saw this as reason for optimism. “Anything below 0.30 would be a huge break in trend” and “positive for stocks,” he said on Tuesday evening. 

This turned out to be correct. Furthermore, a deeper analysis by Lee and his team had them concluding that “the right components [are] showing a slowdown.” Goods inflation remained negative at -0.11% MoM, and used cars fell further to -1.38% MoM (vs -1.11% last month). With real-time data showing a faster decline in used car prices, this trend can arguably continue.

Perhaps more importantly, the two CPI components that Lee and his team have been watching closely showed improvement. Shelter slowed modestly to +0.38% MoM vs +0.42% last month, while auto insurance slowed to +1.76% vs +2.58% last month. These two components are 1.87% of the excess YoY inflation, so any further slowing would help pull down CPI. 

Lee has good reason to expect auto-insurance inflation to fall further. Tuesday’s PPI data release showed the PPI property and casualty insurance (auto and home) component declining to 0.1% MoM, compared to 0.4% in January, February, and March. “This is a huge slowing,” Lee said, with the auto-insurance sub-component also cooling. This is shown in our Chart of the Week.

PPI and CPI tend to sync up eventually, so “to me, this is telling,” Lee said. “Recall that auto insurance is +0.59% of the excess +1.87% YoY CPI over the long-term trend.”

Fundstrat Head of Technical Strategy Mark Newton agreed that “we saw very good action following the CPI report. We've seen a pretty steady decline in Treasury yields, along with the US dollar. Both of those are constructive for risk assets.”

Sean Farrell, Fundstrat’s Head of Digital Asset Strategy, concurred. “Our view since May has been that the macro environment has been working. Rates have continued to roll, and the dollar as well. We just needed that CPI print on Wednesday to bring capital back to the market, and it came back in full force. We saw flows come back to the [BTC] ETF market, and the Coinbase premium is back.”

Newton said, “I think what investors want to hope, ironically, is for economic data to continue to whiff. That is actually going to be conducive for Treasuries to continue rallying. Yields should pull back to the mid-threes in my view, and that should be very, very good for equities between now at least until August. So I think we're in a sweet spot of about three months where we can actually do very, very well even if in the short run, we don't immediately accelerate. There are some things that say we could stall and maybe consolidate – we could see ‘the pause that refreshes,’ so to speak, but I don't think there'll be anything major.” 

Newton on ‘defensive’ sectors

“REITs are starting to bottom out. This is interesting because the allocation among portfolio managers to the REIT sector is the lowest we've seen in 15 years. Tom is bullish on REITs, and this week, I lifted my allocation to technically being overweight the REIT sector. I don't sense that this is overly defensive. I think it's more of a play on yields. Similarly, we’ve seen some strong moves in Utilities of late, and that’s also so much a defensive move as it is a play on anticipated AI-driven growth in demand for power. But we haven't really seen a move like this in the Staples.”

Lee on meme stocks

Gamestop and AMC had an exciting week, as Keith Gill, better known by his Twitter/X handle of “Roaring Kitty”, surfaced after months of online silence with a meme alluding to Gamestock. This caused a spike in shares of both Gamestop and AMC, which by Friday afternoon had largely dissipated. 

During a recent appearance on CNBC, Lee was asked for his thoughts on the re-emergence of meme-stock trading. “I don’t have a view on Gamestop or AMC,” he responded, but with regard to the meme-stock craze, “I think it’s healthy. It highlights a segment of retail investors who are learning about the stock market. I think speculation is healthy, and they’re not employing a lot of leverage, so to me it’s a sign that stocks have a revival potentially coming.”

Elsewhere 

Secretary of State Antony Blinken made an unannounced visit to Kyiv, arriving with the first shipment of weapons from a recently passed aid package and hoping to send a “strong reassurance” about continued U.S. support for Ukraine.

France has declared a state of emergency in New Caledonia, a French territory in the Indo-Pacific that is the world’s third-largest producer of nickel. Violent rioting had broken out throughout the week after France proposed unfreezing voter rolls that have been frozen since 2007 as well as limited voting in local elections to those who have lived in New Caledonia since 1998 or earlier, and their children.

China announced a new initiative to bail out the country’s ailing real-estate developers, including a CNY 300 billion ($41.5 billion) fund that would be opened up to local state-owned enterprises to buy unsold properties and convert them into affordable housing. Beijing also relaxed minimum down-payment requirements on first homes from 20% to 15%, and from 30% to 25% on second homes. Some economists worry that the sum Beijing has reportedly allocated will not be sufficient. 

OpenAI chief scientist and co-founder Ilya Sutkever, who led the team that created ChatGPT and co-led the company’s AI superalignment (i.e., safety) efforts, has resigned. Jan Leike, the other co-leader of the superalignment team, also resigned, later writing that “over the past years, safety culture and processes have taken a backseat to shiny products. We are long overdue in getting incredibly serious about the implications of AGI.” Jakub Pachoki, currently OpenAI’s Director of Research, will assume the position of chief scientist at the company.

Chinese EV maker Nio announced that its next ES6 SUV will be equipped with solid-state batteries, making the company one of the first to incorporate solid-state battery technology into a production vehicle. Solid-state batteries offer higher energy density, which can translate into greater range for vehicles while keeping battery size the same. Nio suggests its SUV could have a single-charge range of 620 miles.

The battle of generative AI models continued this week as both OpenAI and Google introduced new, purportedly more powerful models. OpenAI said its new GPT-4o is not only faster, but can have a live audio conversation and analyze a user’s facial expression on video. Meanwhile, Google said its Gemini 1.5 Flash and 1.5 Pro, will be able to analyze single documents as long as 1,500 pages, or as many as 100 shorter ones at once. Google also announced that Gemini would be integrated into its flagship search engine. 

The International Monetary Fund agreed to proceed with a bailout of Argentina, tentatively approving the release of a $792 million payment in June. The decision signals approval of the austerity measures implemented by Argentine President Javier Milei, which are credited with beginning to tame the country’s runaway inflation (as high as 287% recently) although they have proven unpopular with many in his country.

The Department of Justice has asserted that Boeing was in breach of a 2021 non-prosecution agreement reached after two fatal crashes of 737 Max airliners in 2018 and 2019. Boeing reached a deal with prosecutors in the aftermath of the catastrophes, in which it agreed to pay a $2.5 billion fine and improve its safety and compliance protocols. The DOJ’s conclusion comes in the wake of revelations of alleged safety lapses discovered after a panel blew off of a Boeing jet in mid-flight January. 

And finally: Sir Paul McCartney is officially a billionaire, according to the Sunday Times. The former Beatle’s entry into the ten-figure club was fueled by a recent tour and royalties from Beyoncé's cover of Blackbird, the classic track he wrote in 1968. Sir Paul is the first British musician to make the billionaire list.