CPI AT 8:30

August’s CPI is released at 8:30. In some regards, posted inflation data is exceeding forecasted amounts by a 2 to 1 margin according to the Citicorp Surprise Index.  Analysts are expecting a 0.4% headline increase, 0.3% core.

As noted yesterday, August’s PPI suggested producers during the last six months have been able to pass increased costs onto the end user for the first time in 12-14 years.  How will this be reflected in today’s statistics?

Changing topics, Bloomberg reports Hedge Fund shorts in the NASDAQ 100 are essentially nonexistent.  For twenty-eight straight weeks—the longest since the global financial crisis—hedge funds were a net short of the NASDAQ 100.  They are now a net long.

The reasons for the short position was the belief of higher interest rates, the result of greater than expected inflation, and slowing profit growth would hamper valuations.

As noted many times, almost all are perplexed by the unrelenting rally in Treasuries.  Inflation is almost twice the expected rate but bond yields have declined about 50 basis points.  Wow!  Talk about the inverse response.

Regarding profits, technology has trailed the rest of the S & P 500 in profit growth by 50% since the first quarter.  Third quarter technology profit growth is expected to trail between 25% and 35% as per Bloomberg.

Did the hedge fund capitulate given the unrelenting 3 month advance in the NASDAQ 100, where the expected outcome was far from the one experienced?

As noted many times markets can remain irrational one day longer than one can remain sane or solvent.

As inferred above, the whole inflation theme has not had much traction since peaking in early May even as inflationary expectations are at a new series high, rising to 4.0% over the next three years, up 0.3% from a month ago.

But with more and more regional Fed Presidents becoming hawkish and the Beige Book acknowledging the risk of further price hikes coming down the pipeline, one has to wonder if the market is not going to ask more questions about just how transitory this “transitory” episode actually is.

A major issue at hand, as stated above there is no other side of the trade if sentiment changes.  What happens if there is a sudden realization that inflation is more than transitory?  Volatility for the averages can greatly increase given the massive concentration of funds in a handful of companies.

Commenting on yesterday’s activity, equities were bifurcated.  The Dow advanced about 0.75% while the NASDAQ flat.  Treasuries rallied nominally causing the curve to slightly flatten. Crude advanced about 1.5% to a six-week high on potential storm induced supply disruptions.  Moreover, OPEC predicted stronger global fuel demand with continued and chronic output disruptions such as what is occurring in Libya and the US.

Last night the foreign markets were mixed.  London was down 0.29%, Paris down 0.52% and Frankfurt down 0.03%.  China was down 1.42%, Japan up 0.73% and Hang Seng down 1.21%.

The Dow should open flat but the direction can change radically given the potential significance of the 8:30 data.  Oil is up another 1.0% to $71/barrel, the result of another storm menacing US output. The 10-year is off 4/32 to yield 1.34%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.