Switzer on Saturday

US inflation takes us back to the future… for now

Founder and Publisher of the Switzer Report
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With US stocks down again, it’s one thing to be disappointed that the fall in US inflation has stalled and the closeness of the first rate cut is likely to be pushed back, but it’s another to be totally surprised. After all, that last jobs report for February (where the jobs created ended up being 275,000 when economists were tipping only 198,000) suggested that the US economy wasn’t contracting enough to believe inflation was totally conquered.

For the optimists wanting inflation down, rate cuts happening and another leg up for stocks, this big job creation figure on top of the February CPI (which was a hotter than expected 0.6%, and up from the 0.3% in January) was annoying. However, the annual headline inflation number is still a nice 3.2%. That said, January’s annual reading was 3.1%, and you must remember that the Fed wants inflation at 2%, where our RBA would be happy with a 2-3% result.

If these revelations add to your disappointment at the market selling off today because the Producer Price Index zoomed in at 0.4%, you shouldn’t forget that jobs report did show unemployment rose from 3.7% to 3.9% and wage cost rises were lower than expected. The first result says maybe the US economy is too strong, while the second says that economy is slowing down, suggesting that inflation is also set to keep falling.

So, this leaves us again waiting to see more inflation-related economic data, which then will feed speculation about when the Fed will cut. By the way, there is a consensus of economists that says our RBA will wait for the Fed to move first on cuts before a rate reduction policy starts here. Of course, economists could be wrong, but our inflation and our economic slowdown would have to be more intense for Michele Bullock to start cutting before the Yanks.

History shows we were the first cutters when the GFC got serious, after we learnt that Lehman Brothers was on death row. Undoubtedly, the central bankers of the world had done a ‘pow wow’ on what had to happen, and our first Tuesday RBA get together must have come up before the Fed’s interest rate meeting. That’s why we led the charge to cut rates and rescue the global economy.

In case you missed it, the February Producer Price Index rose 0.6% last month, while the core PPI (which takes out food and energy prices) was up 0.3%. In contrast, the Dow Jones survey of economists expected a 0.3% gain for headline PPI and a 0.2% increase for the core reading.

In reality, the core increase isn’t a big miss. Just as the stock market has overreacted to the upside lately, we could also be seeing an overreaction to the downside. If the market wants to keep overreacting, then I’m happy to see this as a buying opportunity.

By the way, US retail sales at 0.6% rather than the expected 0.8% was another sign that a slowdown is happening in the States. It’s not a serious miss so it won’t be pushing the Fed to move on rates. They will happen this year but there’ll need to be some more firm indicators that the rate rises are starting to hurt more than they currently are.

Chris Low, chief economist at FHN Financial, has got it right with the following: “When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time. After all, this is not the first time in the past couple of years consumers have paused spending for a couple of months to catch their breath.”

To the local story and the S&P/ASX 200 lost 2.3% for the week to end at 7670.3, after the resources sector gave up around 3.4%, which didn’t help the share prices of BHP, Rio, and Fortescue, as the table below of how top stocks fared shows.

The AFR underlined the troubles for lithium players as well. “Lithium miners also tumbled on Friday, as the battery metal price marks losses of 80 per cent over the past 12 months,” its markets team reported. “Mineral Resources lost 2.7 per cent to $65.91 and Pilbara Minerals dropped 6.2 per cent to $3.91.
“Northern Territory-based Core Lithium lost 5.3 per cent to 18 cents after revealing it would mothball its Finniss mine this week due to the lithium price crash.”

In contrast, copper shone with the price of a tonne of this metal over US$9,000 for the first time since April last year. Meanwhile banks copped a downgrade from Macquarie, which didn’t help the big four’s share prices.

What I liked

  1. The NAB business conditions numberrose 3 index points in February to a reading of +10. This is above the long-term series average of 6.6 index points. The result reversed the fall in January and resulted in the conditions index returns to levels seen in November and December.
  2. Business confidencefell 1 index point to a neutral level of zero – the point that separates optimists from pessimists. This says business is negative but not too pessimistic.
  3. While US retail sales rose in February (up 0.6%), it was less than the 0.8% expected by economists. To get a US rate cut, there must be economic signs of a slowdown happening.
  4. JPMorgan was hit with $348.2 million in fines by a pair of US bank regulators. The punishments are tied to a program to analyse firm and client trading for misconduct that has been deemed inadequate. Big firms have to play fair!

What I didn’t like

  1. The monthly pace of US headline inflation was 0.4% in February. This represented an acceleration from the 0.3% pace last month but was in line with expectations, which is OK.
  2. Because of the PPI (up 0.6%), bond players have turned a 100% chance of a US rate cut in June into a 70% chance, though Reuters overnight suggested it might be 62%!
  3. The PPI pushed up bond yields.
  4. European Union industrial production underwhelmed in January, sliding 3.2% in the month to be 6.7% lower than a year ago.
  5. Iron ore continued its slide from recent days and weeks, falling to US$107.35 a tonne.
  6. The US House of Representatives passed a bill that gave Chinese company ByteDance roughly six months to sell TikTok before it was banned from US app stores. Apart from being a Beijing ‘get even’ play, this bill could also influence stocks with Chinese exposure. This includes names such as Apple and Tesla, which could then hit the S&P 500 and subsequently our market on a we play “follow-the-leader” basis.

After a bad week, what do the omens say?

Interestingly, the S&P 500 has seen the most record closes to start the year since 1998, with the first 50 trading days of 2024 bringing record highs for 17 of them! CNBC says that “…the last time the broad index saw more closing highs in the first 50 sessions was 1998, according to data from Bespoke Investment Group. In that year, the index finished at a record level for 20 of the 50 days.”

The year 2024 has seen the fourth-highest amount when examining every year going back to 1953. The year with the most was 1964, when the index finished at a new high for 25 of the 50 trading days.

In 1998, it took until 2000 before the question marks over the valuations for new age tech companies started to get questioned and we saw the dotcom crash of US stock prices.

The above doesn’t change my view that 2024 will be a good year for stocks but I could go more defensive in 2025, especially if Donald Trump is President and he’s calling out China, which he has already started to do.

The recent pullback could get more serious, but we are in a back-to-the-future situation, where we keep hoping and wishing for lower inflation, but this a short-term issue. The future for stocks still looks good based on the belief that interest rates will eventually come down.

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before

 

Quote of the Week

The recent data isn’t “likely to affect the Fed’s trajectory on rate cuts as the trend of slowing inflation is still there,” Rob Conzo CEO at The Wealth Alliance told Investing.com’s Yasin Ebrahim in an interview on Thursday.

“I think they [the Fed] will deliver two or three cuts in the second half of the year,” Conzo said, adding that he remains bullish on the market. The economy “is in the soft landing period right now” and there is “a lot of good” in the recent economic and earnings data, Conzo said.

 

Chart of the Week

US Producer Price Index

 

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Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.