Waiting for Jerome

MARKETS

Let’s Count It Down to CPI Day

Our data dependency is paralyzing right now.

For much of the last hour of trading on Monday afternoon through to the close all of the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite were flashing the Daniel Simpson Day “zero-point-zero” level for their respective intraday percentage changes.
Only the Russell 2000 had shown itself, rising 0.5 percent, according to Koyfin.com.
The mystery here, if you will, is not the infamous “Animal House” fix-it man’s whereabouts but merely Federal Reserve Chair Jerome Powell’s intentions.
When Powell spoke at the Stanford Business, Government, and Society Forum on April 3 he reiterated the importance of inflation expectations. It wasn’t the first time Powell has said he wants to see that key indicator trending lower.
In fact, when the Fed announced the first move in this most recent rate-hiking cycle – 75 basis points – the chair framed it in terms of inflation expectations.
The central bank’s biggest single rate hike since 1994 was meant to anchor inflation expectations. “Expectations” were a key factor that held inflation at a higher-for-longer level in the 1970s.
At the press conference following that big June 2022 move that took the fed funds target range up to 1.50 percent to 1.75 percent, Powell identified as one of the factors in the Fed’s decision to move ahead with 75 basis points what it saw in inflation expectations.
“Some indicators of inflation expectations have risen, and projections for inflation this year have been revised up notably,” he explained. “In response to these developments, the committee decided that a larger increase in the target range was warranted at today’s meeting.”
As James Lee, Tyler Powell, and David Wessel of the Brookings Institution noted at the time, a few days before that press conference the University of Michigan’s preliminary reading on long-run inflation expectations had moved up to 3.3 percent from a range of 2.9 to 3.1 percent. It eventually came in at 3.1 percent.
So, paraphrasing Powell from June 2022, it’s important to understand whether the Fed’s approach has helped ensure that longer-term inflation expectations remain well anchored at 2 percent.
The trend, courtesy of Josh Shafer of Yahoo Finance, looks good.

The University of Michigan Consumer Sentiment Survey for March found that inflation expectations continue to decline.

The most recent University of Michigan survey showed consumers expect inflation to fall to 2.9 percent in the next year, down from 3 percent in February and in a range consistent with 2018 and 2019. The long-run expectation was down to 2.8 percent from 2.9 percent.
“Data dependence” is tough right now because the incoming data are not conclusive for anyone’s narrative case right now. We had another expectations-beating “blowout” headline jobs number, but the rate of wage growth slowed.
Investors, traders, and speculators await 8:30 a.m. ET releases of Consumer Price Index data on Wednesday and Producer Price Index data on Thursday, despite the fact that they all know the Fed’s preferred inflation gauge is the Personal Consumption Expenditures Price Index.
The quest to cure uncertainty is what life is. (And, not incidentally, economy is about life.) So, if that quest is burning for you right now, take a look at the inflation expectations data. The New York Fed conducts a similar survey to the one relied upon by the Brookings folks (and, apparently, Jerome Powell and company too).
Its report for March, released on Monday, also showed signs of stability, with the median one-year inflation forecast steady compared to February at 3 percent. The three-year expectation was 2.9 percent, the five-year 2.6 percent.
We’ll have more on inflation as the week progresses.

DEEP DIVE

They Call It Dr. Copper

It’s a good indicator of economic activity.

Copper is what’s commonly referred to as an industrial metal. It’s not “precious” like silver and gold. It has a lot of uses, and they always seem to be expanding.
Copper’s utility over time is the major reason it’s proven to be a good indicator of general economic activity.
That’s why they call it Dr. Copper, because they say it’s the metal with a Ph.D. in economics.
Last week, copper hit a fresh near-term high on the London Metals Exchange, completing another leg up in a rally that’s been underway since late last year.

The price of copper reached a new 14-month high last week on rising demand and expanding uses.

Copper surged another 1.38 percent on Monday on a report from commodity trader Trafigura that demand could increase by 1 million metric tons by 2030 driven by the development of data centers to support the expanding artificial intelligence industry.
Dr. Copper was already reflecting supply constraints caused by disruptions at major mines.
The Global X Copper Miners ETF $COPX is also looking healthy from a technical perspective, approaching a breakout level off a multi-year base, according to Ian Culley of All Star Charts.
This is broader than AI, though, with emerging signs of normalcy in the global manufacturing sector amid a tightening market for mined ore supporting still higher prices.

WEEKLY MARKET OUTLOOK

Eclipses and Earnings and Consolidations

That is quite a gamut.

That is quite a gamut.Mish Schneider has range, people, as evidenced by both the breadth and the depth of her most recent Weekly Market Outlook.
Perhaps it was the solar eclipse that had investors, traders, and speculators transfixed during the second half of Monday’s session, when everything but small-caps and the Bitcoin $BTC complex seemed to be stuck in its tracks.
We need to keep eyes on retail at these levels, in the form of the SPDR S&P Retail ETF $XRT because it’s a consumption-driven economy. If XRT breaks below 74.50 “that tells you there's something definitely going on.”
Transports provide further insight into the health of the real economy.
And then we have small-caps and the iShares Russell 2000 ETF $IWM with its modest but still impressive outperformance on Monday.

The Russell 2000 was the best-performing index on April 8, 2024, as investors await fresh inflation data.

Small-caps offer a really good window into the US economy. And they’re doing better, supported by solid earnings growth. Support for IWM is at 200, says Mish, and buying dips could present an opportunity.
Mish is also tracking biotechnology and, of course, semiconductors as cyclical indicators.
BTC was up more than 3 percent during the 24 hours into the close on the New York Stock Exchange, with Coinbase $COIN rising nearly 7 percent and MicroStrategy $MSTR up more than 5 percent along with the world’s No. 1 cryptocurrency.
As Mish notes, in the context of other indicators and consolidations, we could be looking at another leg up for the world’s No. 1 cryptocurrency.
Commodities, of course, are still surging, with energy leading the way but metals also participating to the upside.
It’s still a generally bullish backdrop, subject, of course, to what management teams report and say during the upcoming reporting season.
And we should be particularly attuned to commentary around financials and companies with real estate exposure.
The undercurrent will be the risk of a credit event in a rising-yield environment.