“The word 'dog' comes up a lot. Well, I was a wolf, OK? I used to eat dogs.” ~ Jerry West (May 28, 1938 - June 12, 2024)

Good evening,

“Inflation is falling like a rock.” Fundstrat Head of Research Tom Lee has been pointing this out for quite some time, and the truth of that repeated assertion was even more evident in the macroeconomic data released this week. May Core CPI came in at +0.16% MoM, significantly lower than consensus expectations of +0.28%, and half of what we saw for this figure in April. On Thursday, May Core PPI came in at zero, versus Street forecasts of +0.26%.

“This week’s data shows that inflation’s trajectory in May cooled at a faster pace than the stepdown seen in April,” Lee wrote, “and it sort of argues that the relatively ‘hot’ inflation figures we saw from January to March were anomalous.” He and his team found even more encouraging news in the internals of CPI data. Super Core CPI (Core CPI excluding housing) came in negative for the first time since September 2021. 

Perhaps more importantly, the percentage of CPI components below their respective long-term (pre-pandemic) averages jumped to 55% – well above the long-term average of 50%, and the highest since 2019. In other words, most of the CPI basket is back to pre-pandemic levels. In a similar vein, the percentage of CPI components in outright deflation increased to 43% in May, the most since 2019 and well above the long-term average of 30% – as shown in our Chart of the Week:

These downside inflation reads helped boost the markets this week, with the S&P 500 setting all-time record-high closes on Monday, Tuesday, Wednesday, and Thursday, before settling slightly on Friday. (The Nasdaq set new all-time record-high closes every day this week.) Yet, as Head of Technical Strategy Mark Newton observed, “The positive picture we’ve seen for equities has really been all Tech, whereas the broader market still has not really begun to show the same degree of participation. Everybody looks at the broader indices ripping every day and thinks everything's great. That’s true if you are over-concentrated in Technology. Very few investors are truly diversified and invested across all these different sectors, but if you are, you're failing to keep pace with the little grandma who just owns QQQ -0.12% .”

That was not surprising to Lee, who noted that “market consensus continues to lean hawkish.” In his view, “both markets and the Fed are expressing some level of skepticism that this drop in inflationary pressures in May is genuine.” Wednesday’s Federal Open Markets Committee (FOMC) meeting – both its Summary of Economic Projections (SEP) and the press conference afterwards – was somewhat hawkish. 

“It seems the Fed largely ignored the May CPI report,” said Lee, which is curious given the Fed’s repeated avowals of data dependence. (When asked whether FOMC participants had changed their projections after the May CPI release, Fed Chair Jerome Powell responded, “Some people do, some people don’t. Most people don’t.”)

Regardless, Lee remains constructive. In fact, the FOMC’s somewhat hawkish stance this week “sets up for a very positive surprise for equities heading into May PCE (released at the end of June) and June CPI (mid-July),” he asserted. When also considering June seasonality and historical trends, Lee sees the possibility of the S&P 500 hitting 5,500 by the end of the month.

That’s consistent with Newton’s analysis. “I think we will probably see the S&P 500 get up to right near 5,500, with probably a maximum target of 5,540,” he said at our weekly huddle. When he looks a bit further out, “we're going to likely have to see some consolidation. A lot of my cycles start to turn down from June expiration into July before we push back up into August, though, so I don't sense that any consolidation will be long-lasting or really severe.” 

Elsewhere 

French President Emmanuel Macron called for a snap election scheduled for June 30 and July 7, dissolving Parliament in response to a surprising show of strength by the far right in elections for the country’s representatives to the European Parliament. Macron’s centrist Renew party was soundly drubbed by Marine Le Pen’s National Rally, which has seen rising support in recent years. In the aftermath, the center-right Republican party fractured over whether to ally with National Rally, with some Republican members seeking to oust party leader Eric Ciotti for his under-the-radar negotiations with NR. France’s CAC 40 index was down almost 4% this week, a decline largely attributed to the political uncertainty.

The Bank of Japan left short-term rates unchanged at between 0.0% and 0.1%, but indicated it would consider “significantly” reducing its purchases of Japanese government securities – in effect scaling back its longtime ultra-loose monetary policy.

South Korea’s Financial Services Commission extended its ban on short selling until at least March 2025, citing a lack of systems to detect naked short sales. The ban was enacted in November 2023 and had been set to expire on June 30, 2024.

A new study suggests semaglutide, better known as Ozempic and Wegovy, could also help reduce cravings for alcoholic beverages and thus be part of a treatment plan for alcoholism. The study, conducted by Case Western Reserve scientists, found that semaglutide treatments were associated with a 50% to 56% reduction in the likelihood of being diagnosed with alcoholism.

Imprisoned Wall Street Journal reporter Evan Gershkovich will stand trial in Russia for allegedly gathering intelligence for the CIA, Russian authorities announced. Gershkovich, the Wall Street Journal, and U.S. officials  have all described the allegations as baseless. Gershkovich was arrested in March 2023.

G7 leaders reached a preliminary agreement on a deal to lend $50 billion to Ukraine, which the embattled country would repay using interest earned on frozen Russian assets held mostly in European banks.

The Port of Baltimore reopened fully 11 weeks after the cargo ship Dali destroyed the Francis Scott Key Bridge, blocking the channel with 50,000 tons of wreckage. The FBI and the Coast Guard continue to investigate the circumstances of the collision. Maryland authorities estimate that it will take four years and roughly $1.9 billion to rebuild the bridge. 

And finally: The British Geological Survey detected earthquakes this week, but the readings were attributed to Taylor Swift’s three nights of concerts in Edinburgh, Scotland. In addition to adding a projected GBP 1 billion (USD $1.27 billion) to the U.K. economy, Swift’s performance roused fans to dance en masse, causing vibrations that could be detected up to four miles away.

Notice: U.S. Markets and Fundstrat offices will be closed on Wednesday, June 19, 2024 in observance of the Juneteenth holiday.