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CPI Released at 8:30

January’s CPI is released at 8:30. Consensus is expected inflation to decline from a 3.4% annual rate to 2.9%.  The core rate of inflation is projected to fall from 3.9% to 3.7%.  Generally speaking, inflation has remained stubbornly high even after the most aggressive Fed in history.  The trend is down however one would have expected pricing pressures to have eased even more based upon Fed policy.

Speaking of which, according to a poll of the National Association for Business Economics (NABE), 21% of the respondents consider Fed policy to be “too restrictive,” the most since mid-2010.

This is yet another disconnect between the market and central bank.  As written many times, the market is suggesting five or six interest rate reductions by year end.  The Federal Reserve is projecting only two or three.

Changing topics, it is widely accepted the markets are very concentrated and top heavy.  Bloomberg writes the FANG+ cohorts are up 28.4% since 10/26/23 and 74.5% since 3/13/23.  The top ten holdings in the S & P 500 now comprise over 32% of the capitalization of this benchmark index, the most since at least going back to 1980.

Writing it differently, both MSFT and AAPL are worth more than the Russell 2000.  NVDA is worth more than the entire capitalization of the Chinese market.

The disconnect between the NASDAQ 100 and the Russel 2000 is historical.

Many have stated this is the most overcrowded trade in history, a trade that gets more crowded each day.

This disconnect will change but the question is as to when.  As stated, many times markets can remain irrational one day longer than you can remain solvent or sane. 

Equity markets were bifurcated yesterday as the NASDAQ declined about 0.4% while the Dow advanced 0.25%.  Treasuries were generally quiet.

Last night the foreign markets were down.  London was down 0.28%, Paris down 0.42% and Frankfurt down 0.57%.  China was up 1.28%, Japan up 2.89% and Hang Seng down 0.83%.

Dow and NASDAQ futures are down 0.1% and 0.75%, respectively ahead of the CPI release.  The headline rate is expected to be below 3% for the first time since March 2021, it may not be enough to justify a more rapid shift in monetary easing especially as the core rate remains elevated around 3.7%.   The 10-year is up 3/32 to yield 4.16%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.