Just Another CPI Week

MARKETS

What Does a Rate Cut Mean?

We should be careful what we wish for.

We’re back to “Being Jerome Powell.”
It’s been a refreshing earnings-and-economics-driven rally so far in May, but this week investors, traders, and speculators will be preoccupied with occupying the mind of the world’s No. 1 central banker.
“What’s he thinking about Producer Price Index and Consumer Price Index data for April?” is the question they want answered.
In a minor twist, we’ll see PPI data first this time around, at 8:30 a.m. tomorrow, with CPI to follow at 8:30 a.m. on Wednesday from the Bureau of Labor Statistics.
The Fed Chair himself is actually scheduled to participate in a moderated discussion with De Nederlandsche Bank President Klaas Knot at the annual general meeting of the Foreign Bankers’ Association in Amsterdam at 10:00 a.m. on Tuesday.
He’s unlikely to directly address that morning’s PPI news.
Anything he does say about inflation and interest rates will show up in that day’s price action, and quickly.

Analysts forecast the Consumer Price Index excluding food and energy cooled in April compared to March.

Almost 90 percent of the S&P 500 has reported this season, and more than 80 percent of them have beaten earnings estimates. Sixty percent of them have beaten revenue estimates.
According to FactSet, earnings per share will grow 5.2 percent year over year, up from a forecast of 3.4 percent as of March 31. That would be the fastest pace of earnings growth since 2022.
And the consensus forecast for second-quarter earnings growth has risen from 9 percent to 9.8 percent.
There’s still some work to be done, with retailers to report starting this week and Nvidia $NVDA to conclude this chapter of “The Magnificent Seven” story on May 22.
We’ll also see US retail sales data for April on Wednesday at 8:30 a.m. ET. as well as multiple housing sector and sentiment reports during the week.
The big number, though, is April CPI.
The consensus expects the BLS to report a 3.4 percent year-over-year rise in the key inflation gauge. That would mark a slowdown from 3.5 percent in March.
The forecast for core CPI – which excludes food and energy prices – is 3.6 percent, down from 3.8 percent in March.
Let’s think something through here, prompted by Randal Forsyth of Barron’s and his May 10 Up and Down Wall Street column.
As Forsyth notes, earnings look good because numbers are exceeding forecasts. But sequential and annual comparisons are less shining.
And he suggests that estimates for second-quarter and full-year growth assume top-line growth that’s not supported by much.
Finally, let’s say we do see a rate cut. Maybe this week’s PPI and CPI data are so soft as to convince Powell & Co. that inflation is indeed trending toward the Federal Reserve’s 2 percent target.
The implication is the economy is slowing, people, and if the economy is slowing earnings are too. If the Fed cuts, be prepared to talk about earnings disappointments later this year.
That’s the rest of the story.

DEEP DIVE

Let’s Get It On

Google Search needs to be disrupted.

According to Reuters, OpenAI will introduce its artificial intelligence-powered search product today.
Such a move would mark a major challenge to Alphabet $GOOGL and its once-dominant Google engine.
Bloomberg and The Information previously reported that OpenAI, backed by Microsoft $MSFT, is building a search tool to compete with Google.
Bloomberg reported that OpenAI’s tool will be built into its ChatGPT chatbot and will include citations. The Information reported that it might be “partly powered by Bing.”
Shortly after Reuters published its report on Friday, OpenAI confirmed in a post on the social media platform X that it will stream a live event at openai.com today at 1 p.m. ET “to demo some ChatGPT and GPT-4 updates.”

OpenAI will introduce new features today at 1:00 p.m. ET.

Later, CEO Sam Altman posted, “Not gpt-5, not a search engine, but we’ve been hard at work on some new stuff we think people will love! feels like magic to me."
Whatever OpenAI reveals today, management knows Google’s time as the global search-engine hegemon is over.
According to CNBC, senior VP Prabhakar Raghavan told Google Search employees last month that “it’s not like life is going to be hunky-dory, forever.”
Raghavan said that Google needs “to twitch faster,” like athletes twitch faster, “if there’s a clear and present market reality.”
GOOGL gapped down at the open on the Reuters report but bounced after Altman’s post on Friday afternoon. It closed down 0.77 percent but is up more than 20 percent so far in 2024.
This competition should be both fun and fruitful for observers and searchers.

RETAIL

Shopped Till We’ve Dropped

The consumer is still the basis of the economy.

The consumer is still the basis of the economy.Mish Schneider leads her Weekly Market Outlook with a review of what she calls the “Economic Modern Family,” a collection of ETFs that together explain what’s happening at a broad level in that moment of time.
Mish often opens with the SPDR S&P Retail ETF $XRT.
During the first quarter, personal consumption expenditures accounted for nearly 68 percent of gross domestic product, versus a long-term average of 64.3 percent.
The consumer is an important part of the economy, in fact the most important part.
And they’re down, according to preliminary University of Michigan Consumer Sentiment Index data for May released on Friday.
It’s all about inflation expectations, as Mish rightly noted in her May 6 Outlook.
“Costs are rising,” Mish said. “We know people are eating out less, but they’re still spending some money.” That people are still spending money is reflected in XRT, which is positive for the year but is underperforming the S&P 500.
The ETF remains below its April 12 near-term high around $75. The key downside level entering this week remains $73.50 – “definitely the pivotal point to keep in mind,” as Mish noted last week.

The SPDR S&P Retail ETF $XRT is up nearly 3 percent year to date but trails the broader S&P 500, which is up nearly 10 percent.

Big retailers Home Depot $HD and Wal Mart $WMT will report on Tuesday and Thursday, respectively. Each will offer important information about the health of their respective businesses as well as the broader economy.
But there’s a much lesser-known company we’ll be tracking this week too.
Boot Barn Holdings $BOOT, which as of May 9 was the No. 3 holding in the XRT portfolio at 1.71 percent of assets, will report after the close on Tuesday.
Carvana $CVNA, the fund’s top holding at 2.02 percent, reported its best quarterly results ever on May 1, swinging from a loss of $286 million, or $1.51 per share, a year ago to a profit of $49 million, or $0.23 per share.
GameStop $GAME, the No. 2 holding at 1.76 percent, will report fiscal first quarter results in June.
According to survey director Joanne Hsu, the 10-point decline in the University of Michigan index to 67.4 percent from 77.2 percent in April following three consecutive months of very little change “is statistically significant.”
The index is at its lowest level in six months. Hsu said it was characterized by a broad consensus across age, income, and education, with consumers in western states showing a particularly steep drop.
Consumers expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead, Hsu explained.
It’ll be interesting to see the transmission effect between this week’s inflation data and the next fresh batch of consumer confidence data. The University of Michigan will release final data for this month on May 24.
We’ll also be watching XRT this week.
And be sure to catch Mish’s updated Weekly Market Outlook later today.