13 May APRIL’S CORE CPI ROSE BY THE GREATEST AMOUNT SINCE 1982 CHALLENGING THE TRANSITORY NARRATIVE
April’s CPI greatly exceeded estimates by all dimensions. The core CPI, which excludes food and energy, surged by 0.9% versus a 0.3% estimate. The surge was broad based and the greatest increase since 1982 according to government statistics.
The overall CPI rose by 0.8%, the greatest increase since 2009, versus the forecasted increase of 0.2%.
OER or Owner’s Equivalent or what someone think they can rent their home for if it was rental met expectations and was unchanged from the previous month, rising by 0.2%. OER is about 32%-33% of inflationary indices and is a major reason why inflationary expectations are viewed as “anchored.” Historically OER follows home prices, but there is a lag.
This data is a directly challenging the “transitory narrative” and the prevailing view upcoming statistics will be distorted because of the pandemic depressed levels of last year.
Surprisingly, immediately following the report Treasuries were little changed. However, selling increased during the day sending the 10-year down about 5/8 point and the thirty year off over 1 ¼ points. The yield curve steepened by the greatest amount in 7 months according to Bloomberg.
Led by the technologies and mega sized growth issues, equities traded lower. The NASDAQ is down over 9% in eight trading days. While the immediate decline is steep, it is nothing compared to the outsized gains since last March and over the last five years.
Changing topics, gasoline demand is surging. According to the research firm Gas Buddy, demand in the East is up 42% from this time last week. Shortages are now reported in the mega sized metropolitan areas of New York and New Jersey.
Like most I believe these shortages will be short lived and supplies will return to normal. Sales have been sharply front loaded via panic buying.
As stated many times I believe there was five or six years of revenue growth compacted into 14 months for the mega sized technologies. Sales were front loaded because of the pandemic but companies were/are priced as though this growth will continue into infinity.
As noted several times, earnings for the tech group had the biggest “earnings beat” in history and as a cohort traded lower following the release of results. As noted above the NASDAQ is off about 9% in eight trading days even as Treasury yields are still lower then when earnings season commenced, a primary component of valuations.
It is foolish to believe gasoline demand really increased by 42% in a week. Fortunately, companies in this segment have not surged as it is believed that such demand is not sustainable.
I rhetorically ask what is the difference between COVID induced buying and a pipeline closure induced buying? Are they both unsustainable?
Just as an aside. As noted above the core CPI surged the greatest since 1982. The two-year Treasury or the instrument most sensitive to monetary policy was yielding around 14% at that time. Today it is yielding 0.16% and the Fed has pledged not to raise the overnight rate until the end of 2023. Wow! I am not suggesting a return to yields of 40 years ago but merely making an observation.
What will happen today? The PPI is released at 8:30 and a 0.3% and 0.4% increase is estimated for the overall all and core PPI, respectively.
Last night the foreign markets were down. London was down 2.10%, Paris down 1.09% and Frankfurt down 1.40%. China was down 0.96%, Japan down 2.49% and Hang Seng down 1.81%.
The Dow and NASDAQ should open nominally lower perhaps on the emerging view the markets are losing some confidence in the Fed’s ability to fight inflation. The 10-year is up 1/32 to yield 1.69%. Oil is off about 2.5% on the restart of the pipeline.