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PPI Exceeded Expectations

The PPI rose more than expected, led by a sizeable jump in cost of services and highlighted the sticky nature of inflation.  Treasuries sold off across the curve.  Fed funds futures are now only suggesting 85 bps of Fed easing during 2024, closely matching the long-held Fed forecast of 50 to 75 bps of reduction. As little as two weeks ago futures were suggesting over 150 bps of cuts.

The odds of a reduction in May are now less than 25% versus around 50% before the data was released.

Last week the rhetorical question was asked what are the odds that the Fed does not lower rates?  Friday former Treasury Secretary Lawrence Summers said that persistent inflationary pressures evident in the latest data suggest that there is potential for next Fed policy move to raise interest rates, not lower them.  Summers defined “meaningful chance” as 15%. 

Perhaps the only certainty to write that if this does occur, volatility may increase.

Stocks struggled to gain traction.  The “Magnificent Seven” led the NASDAQ lower.

Bank America stated Friday “a host of similarities between tech stocks now and previous bubbles suggest the Magnificent Seven is nearing—but not yet at—levels that may lead it to pop.”

Chief amongst these indicators are interest rates.  Second are valuations.  With a price earnings ratio of 45, the “Magnificent Seven” group is expensive by any stretch.  Bank America, however, stated that past rallies reached even more extreme levels before hitting a peak.  For example, a PE ratio of 65 for the NASDAQ Composite in 2000.

Third is the magnitude of the advance. Since a low in December 2022, the “Magnificent Seven” has jumped about 140%, moderately lower than the 190% surge during the Internet bubble for the NASDAQ Composite.

The Bank however stated the massive concentration of funds in a handful of names “is extremely frightening and riddled with risk,” further elaborating that any decline in these issues may have outsized effect upon the indices, inferring that markets are fundamentally flawed.

What will happen this week?

The economic calendar is light, comprised of the Index of Leading Economic Indicators, the Minutes from the recent FOMC meeting and existing home sales.

Last night the foreign markets were mixed.  London was up 0.11%, Paris up 0.28% and Frankfurt down 0.20%.  China was up 0.42%, Japan down 02.8% and Hang Seng up 0.57%.

Dow and NASDAQ futures are down 0.25% and 0.60%, respectively following some high-profile mergers such as Capital One acquiring Discover and Wal-Mart acquiring VIZIO.  NVDA earnings are announced tomorrow after the close.  Will its report support its incredible gains?  The 10-year is up 1/32 to yield 2.28%.

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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.