“I am not ready to back away from my views.” ~ Alexei Navalny (1976 - 2024)

Good evening,

The primary macroeconomic event impacting markets this week was the release of the latest Consumer Price Index (CPI) reading. As we began the week, Fundstrat Head of Research Tom Lee told us that, anecdotally, based on his conversations with clients, RIAs, and investors at various industry events, uncertainty seems to be pervasive. 

He highlighted two common perspectives: “nervous bulls” who realized gains during the present 15-week rally, and “angry bears” who are unhappy with the disconnect between the market’s behavior and what they believe it should have been. “Based on our multiple interactions, the predominant view is that of the angry bears” who see the Fed’s stance and the market’s behavior  (based on trading activity) as misaligned.

Yields are up – the 10-year has risen to its highest level in months (4.295%  as of Friday afternoon) – yet, as Head of Technical Strategy Mark Newton had noted in past weeks, the traditional correlation between stocks and yields has not been in evidence recently, as stocks have risen alongside yields. To Lee, this is a sign of market strength. Yet, Lee continues to urge caution as long as the timeframe for the Federal Reserve’s anticipated rate cuts remains unclear, amplifying nervousness and uncertainty.

They were certainly in evidence on Tuesday, when CPI came in hot vis-à-vis consensus. The latest read showed inflation continuing to decline, but not as quickly as the Street had expected. Many – economists, pundits, and investors – suggested that this could cause the Fed to delay rate cuts, and the day ended with the S&P 500 down about 2%. Lee responded, “In our view, this is an over-reaction to a single CPI print. Markets might panic, the Fed might hesitate, but if you peel the onion, [this CPI print] is not that bad.”

He was not alone. During a speech the next day at the Council on Foreign Relations, Chicago Fed President Austan Goolsbee said, “Let’s not get too flipped out,” later urging observers not to get “amped up when you get one month of CPI that was higher than you expected it to be.”

Consistent with the assessments Lee has been making for months, Goolsbee stressed that “it’s totally clear that inflation is coming down [...] We can still be on the path [to the Fed’s target inflation of 2%] even if we have some increases and some ups and downs.”

What does that mean for equity investors? In his 2024 Outlook Lee had warned that, although the market would likely hit new highs in January, a brief period of consolidation could follow before another rally in the second half of the year. Was the hot CPI print the catalyst to mark a short-term top? 

“We don’t think so,” Lee said. “Near-term peaks are usually marked by a sell-off on good news,” he said, “and that’s not what happened on Tuesday.” And on Friday, when PPI came in hot, stocks barely slipped. Based on this, “we think stocks have upside in the near-term,” he told us.

Lee also observed that peaks usually happen after buying power is exhausted. The July 2023 top was preceded by a peak in margin debt, and current margin debt is still below those levels. “These levels need to surge to mark a near-term top,” Lee said. This is shown in our Chart of the Week:

Elsewhere 

The U.S. Patent and Trademark Office has ruled that inventions created primarily with AI tools such as generative AI cannot be patented. An invention can only be patented if a human made a “significant contribution” to it, and only a human can hold a patent. As an example, “a natural person who only presents a problem to an AI system” such as merely asking a generative AI to create a design “may not be a proper inventor of something,” according to the USPTO. “However, a significant contribution could be shown by the way the person constructs the prompt in view of a specific problem to elicit a particular solution from the AI system.”

UK headline inflation YoY stayed constant in January, matching the 4% seen in December. The Office for National Statistics also reported that YoY core inflation, defined as excluding energy, food, alcohol, and tobacco, remained unchanged, at 5.1%. Core CPI MoM was -0.9%. All three measures came in below consensus expectations.

The University of Pennsylvania announced a new undergraduate degree in artificial intelligence. It will be the first such degree offered by an Ivy League university and will become an option for students this fall. Required coursework will cover Machine Learning, Vision & Language, and Optimization & Control. Other schools offering such a degree include computer-science powerhouse Carnegie Mellon University and Purdue University, an engineering mainstay.

Microsoft and OpenAI said hackers linked to the governments of Russia, China, and Iran have used OpenAI’s ChatGPT to carry out attacks. This includes using the chatbot to generate phishing scripts and realistic human responses, write code, research cybersecurity tools, and identify human targets. In its report, the companies identified cyberwarfare groups linked to Russian intelligence, Iran’s Revolutionary Guard, and the governments of China and North Korea. A Chinese spokesperson described Microsoft’s allegations as “groundless smears and accusations.”

The first-ever private lunar lander was launched this week, and if it lands successfully on February 22, the goal is to put the first human-made artwork on the moon. An unmanned Nova-C lander made by Intuitive Machines, launched aboard a SpaceX Falcon 9 rocket, is expected to deliver not just NASA scientific equipment, but also 125 one-inch-high Jeff Koons sculptures of moon phases representing historic figures such as Mozart, Cleopatra, Gandhi, da Vinci, and the Starman otherwise known as David Bowie.

Japan slipped into recession and fell in the rankings of the world’s economies by size. After recording annualized GDP growth of -0.4% in 4Q2023 and -3.3% in 3Q2023, Japan is no longer the third-largest economy in the world – Germany is. 

And finally: Britons are feeling the pain from Houthi attacks in the Red Sea, which have disrupted shipments of tea, causing a tea shortage. “This is a critical period which requires our constant attention,” said Tetley Tea, one of the most popular brands in the United Kingdom. Some observers have suggested that panic-buying by “cuppaholics” had exacerbated the shortage in much the same way panic-buying contributed to toilet-paper shortages during the pandemic. 

Notice: U.S. markets and Fundstrat offices will be closed on Monday, February 19, 2024 in observance of Presidents’ Day. There will be no publications that day.