Understanding PCE: Inflation measures and market implications, markets shrug off verdict

Breaking news – in case you haven’t heard yet….12 ordinary New Yorkers, off the street found Donny Guilty on 34 separate counts…. think about that for just one min….12 people voted unanimously on 34 counts…and not one of them had a question? …. Not one of them had an issue with any of Cohen’s testimony…What are the odds?  34 different counts and not ONE question…. Amazing, right?  - Clearly this saga is far from over, I do not believe it will have an outsized impact on the markets, in fact, it might just surprise you….Futures are mixed -  Dow is UP 10 pts, S&P’s down 5, Nasdaq down 50 and the Russell off by 3 pts  at 5 am…THAT is not a disaster at all….but then again, maybe some of the action this week was a pre- reaction to this possible verdict?  In any event -

It was TECHS turn yesterday….as investors hit the sell button on anything tech after the latest round of economic data suggests what?  A slowdown!!  Can you believe that?  Just one day before the release of the FED’s favored inflation gauge is due out, yesterday’s data showed that the economy grew at a ‘softer pace’.  Softer being the KEY word here…. See below.

Personal Consumption (the economy’s growth engine)– only advanced by 2%, down from 2.5% last month and below the expectation of 2.2%! 1st Qtr. GDP was revised down to 1.3% (from 1.6%), The Core PCE Price Index only rose by 3.6% - below the expected 3.7%.  Just for clarification – the Core PCE Price Index is a measure of the prices paid for goods and services by people living in the US – It excludes food and energy in order to give you a ‘clearer picture of long-term inflation trends. This is a closely watched measure by the FED…. So just to be clear – the price index reflect prices are rising at 3.6% but they are not rising at 3.7% - thus the celebration…. Get it?

Now it is important to note that today’s PCE Deflator – also a key FED data point – sounds like the same thing, but is in fact slightly different…Today’s PCE Deflator includes the same items as the PCE Price Index but ‘adjusts’ the nominal value of consumer spending for inflation to reflect ‘real’ spending… The PCE Price Index is a stand-alone data point – meaning they don’t use it in any other measure, while the PCE Deflator is used as part of the GDP calculation to reflect ‘real growth’.   Interesting that we saw GDP revised downward yesterday – which now gives me the sense that today PCE Deflator will be ‘better than expected’ meaning it will (should) show a decline in inflation…. And again – you know what that means……

Retail inventories m/m ROSE by 0.7% (suggesting that people are not shopping – think tiring of inflation and high prices as well as financial exhaustion – we heard that from MCD, KSS, WMT, HD, WEN etc.), and Pending Home Sales m/m plunged by 7.7% - 6.7% more than the estimate – think higher mortgage rates.  So, you ask – if the economy is slowing then the FED has to cut rates and if they do that, then why did TECH sell off?  Lower rates are good for tech, no?  Not this time – because if this is true – a slowing economy suggests tougher times ahead all while inflation remains an issue.

Again, be careful what you wish for – in this case – IF the FED cuts rates it is NOT because inflation has subsided, but more because the economy is about to go off the edge – This is not a subtle differernce….so here is where you have to consider – Stagflation. Now to be clear – Stagflation is the condition where we suffer from stagnant economic growth, high unemployment and high inflation.  Capisce?  In the end – the economic data becomes a double-edged sword – it can slice both ways. 

So, what happened?  The Dow lost 330 or 0.9%, the S&P gave up 31 pts or 0.6%, the Nasdaq got punched in the face – losing 184 pts or 1.1% all while the Russell added 20 pts or 1%, the Transports gained 195 pts or 1.3% and the Equal Weighted S&P added 30 pts or 0.5%. 

Now that sounds like another disaster, no?  It was NOT… of the 11 S&P sectors – only Tech – 2.3%, Communications – 0.35% were lower…. The other 9 sectors gained – reversing the weakness seen earlier this week.  Real Estate – XLRE was the day’s winner – up 1.4% (again think lower rates),  (Homebuilders – XHB not one of the 11 sectors – was also up 1.7% - you can connect the dots there),  Utilities – XLU gained 1.3%, Basic Materials – XLB + 0.8%, Industrials – XLI + 0.7%, Consumer Discretionary – XLY +0.6%, Financials – XLF +0.5%, Energy – XLE + 0.3%, Consumer Staples- XLP +0.3% and Healthcare – XLV was flat on the day – which was a win!.

Bonds actually rallied on the idea of softer economic data…because that means lower rates – so we saw the TLT rise by 1% and the TLH rise by 0.8% and the AGG gain 0.45%. The 2 yr. yield fell to 4.91% down from 4.97% while the 10 yr. is yielding 4.53% down from 4.61%. 

Adding to the excitement was NY FED President Johnny Williams who said, ‘he expects inflation to continue falling in the second half of the year’ and that plays right into the multiple rates cut narrative – trust me…. they are looking for a way to calm everyone down and stop the bleed…. In the end though – do not mistake the two…. Yes, the economy may experience a soft landing if they lower rates, but in the end, they run the risk of ongoing higher prices.  Growth is about economic expansion and the continuation of corporate profits. You know that I am in the camp of NO cuts – because I think inflation will remain an issue, but I do believe the economy remains more robust than not and therefore I expect profits to continue to grow and that is what will drive markets higher.   And the pull back this week – all I have to say is ‘It’s about time!’  - don’t you think? I’d still like to see a bit more, how about you?

Now the chip stocks got hammered a bit…NVDA -3.7% or $43/sh – some now raising concern – asking How could that be?   Which is laughable really, because NVDA is up 123% ytd….so are you really going to whine over a 3.7% pullback?  I guess you might if you top ticked it at $1150 the other day… SOXX ETF lost 0.7%, the growth trade – SPYG gave up 1.5%, Cybersecurity lost 2.7%, Expanded Tech Software – IGV gave up 5.7%, while Expanded Tech – IGM gave up 2.5%. and the XLK lost 2.3%.  These last two – hold the same names, but in different percentages, thus the difference in performance.

Ok – so the day is upon us….at 8:30 am – we will get the April PCE Deflator report…and it is expected to be ‘better – think weaker’….the official topline consensus is for it to show an increase of 0.3% m/m and +2.7% y/y….but the whisper number is +0.2% m/m and +2.6% y/y.  The Core PCE Deflator – ex food and energy – is expected to show an increase of +0.2% m/m and +2.8% y/y.  And like I said above – yesterday’s GDP downward revision would support the weaker number…it is almost impossible for GDP to be lower if the PCE Deflator is higher.  If that is the case – then watch as they push the narrative that inflation is slowing, and the economy is downshifting into a slower growth mode (vs. a negative growth mode) so the danger of a hard landing is almost zero!

Oil got slammed yesterday…. falling more than 1% as gasoline demand appears to be ‘soft’, yesterday’s eco data points to further downside risk for the economy and not to be forgotten – Chinese demand also appears to be soft…. (here we go again!)  For May – oil has seen a 6% decline in value – going from $82 to $78/barrel.  Gasoline stockpiles rose by 2 mil barrels last week – ahead of the long weekend. Daily demand came in at 8.6 mil bpd – down about 1.4% y/y….and that is recreating the demand destruction story……Today’s PCE data plus Sunday’s OPEC+ meeting raising more concerns that oil prices are headed lower even as OPEC+ is expected to extend the 2.2 million barrel production cut thru year end and possibly into 2025. 

So here is one of the issues – OPEC+ and the Saudi’s used to have more sway over oil prices but the growth in production by NON-OPEC+ members (think US, Canada, Brazil, Guyana) has taken that control away from them.  OPEC+ cuts production, while the NON-members increase production – creating a situation where supply continues to exceed demand – something I am just not sure I really believe.  Yes, we are awash in oil, the world is not running out anytime soon, but demand is strong, and IMO will remain strong. The summer driving season has just begun, energy hogs – think computing and bitcoin mining are not going away, New Home neighborhoods being built by the homebuilders demand energy, New high risers 15+ stories -  going up in Miami, Ft Lauderdale, West Palm Beach, and the Gold Coast all demand energy…and that’s just here in Florida…think about the other 49 states…In the end – energy demand is not going away….which doesn’t mean that supplies won’t grow – they will as the production tech gets more sophisticated. But again, that just means there is MORE supply not that demand is waning.

Gold initially traded lower yesterday to end the day unchanged at $2,365/oz…. this as gold traders sifted thru the economic data to figure out what is going on…. The dollar index (104.78) and bond yields both ended the day lower, and this helped to support gold prices. If today’s PCE deflator comes in weaker – then expect the dollar to weaken and gold to rally, if not – then expect the dollar to strengthen and gold to decline. This is not brain surgery…. Right now – we remain in the $2350/$2450 trading range – with a bias to the upside right now due to the weaker eco data yesterday and possibly today.

US futures – ok – like I pointed out above – futures are mixed to UP….the Trump news doing little to nothing in terms of market action…..Remember – while politics create all kinds of news and excitement in the short term, it does not create long term value at all….so any of you thinking that the verdict was going to create a s**t show today…..think again….

European markets are essentially flat…not doing much of anything on either side…. Eurozone inflation just came out and it showed a rise of 2.6% up from 2.4%. Core inflation rose to 2.9%, up from 2.7%.  Now will this change the story. Will the ECB reconsider whether to cut next week or not?  Recall that they have basically promised a 25-bps cut next week – so anything less could end up being a shock for markets. Stay tuned – that is a Thursday event next week.

The S&P closed at 5235 – down 32 pts….trading in a range of 5222/5260….Now while the past week has felt ugly – the S&P is only down 1.9% - basically 100 pts off Friday’s high of 5341, the Nasdaq is also only down 1.7% – Neither one even tested short term trendline supports at 5179 and 16,253 – levels I was convinced had to be tested.  And who knows - they may still test it. But a meltdown?  Not happening…. although, selfishly, I would like to see more of a pullback, just because I want to go shopping….

Look – the name of the game is still all about inflation and monetary policy. Today’s PCE and next week’s PMI” s and NFP reports will reveal a lot more….so sit tight and stick to the plan.  Call me to discuss.   

Grilled rib eye with arugula and grana padano

There are only a couple of ingredients…. a nice Rib-Eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.   This dish is about simplicity.

Just FYI – Grana Padano – is one of the most popular cheeses in Italy.  It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.

Season the Rib-eye with s&p and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.

Heat your grill – Place the Rib-eye on the grill and sear for 4 mins and then flip over and cook for another 3 to 5 mins – depending on thickness.

Next – allow it to rest for 3 mins and then carefully slice it diagonally to make it look pretty.

When serving - Place on a warmed plates and cover with fresh arugula & chopped red onion – that has been seasoned with s&p, dried oregano, olive oil and a squirt of fresh lemon juice – To finish – dress this with razor thin slices of the Grana Padano.  Serve immediately with a house Chianti.