Inflation Cools, Stocks Climb…

INFLATION COOLS, STOCKS CLIMB: Another Solid Week for the Bulls!

Are U.S. consumers getting a much needed break from high prices? Most people would look at their grocery and electric bills and say no, it’s just as bad as ever. As usual, however, the government paints a different picture with bright and sunny inflation numbers.

As long as you stay in an ivory tower and never venture into the real world, the June inflation data should provide a sense of relief. After all, the year-over-year increase in the Consumer Price Index (CPI) in June of 2022 was 9.1%. It’s currently less than half of that, but don’t get the wrong idea.

A lower CPI print doesn’t mean that the products you consume are cheaper, just that the pace of price inflation is slowing down. In other words, America is in a period of disinflation, not deflation.

If you choose to believe the published numbers, the U.S. CPI grew nearly 5% year-over-year in April, then 4% in May, followed by 3% in June. Of course, no one expects 2% in July and 1% in August; it will be seeing “diminishing returns” from here on.

Economists had expected the June CPI to grow 3.1%, so the 3% result was a slightly positive surprise, and many financial traders and commentators breathed a huge sigh of relief. A typical example is George Mateyo, chief investment officer at Key Private Bank, who blithely declared, “There has been significant progress made on the inflation front.”

Whether “significant progress” has actually been made is debatable. The shelter index increased 7.8% year-over-year, so it’s still increasingly expensive to have a roof over your head. This stands in stark contrast to the 2008-2009 financial crisis, which was precipitated by crashing home prices.

When you take away food and energy costs, the so-called core CPI increased 4.8% year-over-year. That’s closer to what’s happening in the real world, but it still doesn’t reflect the reality of sky-high costs for a range of essential goods.

Meanwhile, the June Producer Price Index (PPI), which measures what manufacturers pay for the goods they sell, increased 0.1% month-over-month. Economists had anticipated that the June PPI would increase 0.2%, so again, the optimists had another data point to lift their sails.

Of course, Wall Street couldn’t care less about inflation’s impact on the American middle class. Their concern is how the Federal Reserve will respond to seemingly improving price inflation. The idea is that cooling inflation will prompt the Fed to continue pausing its policy of raising interest rates.

It’s odd logic because the market knows full well that the Fed is going to raise interest rates this month regardless of the apparently favorable inflation data. The market currently puts the probability of a rate hike at this month’s FOMC meeting at 90%.

Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, articulated what everyone’s thinking: “For now, the stage appears to be set: The Fed is still on track to raise interest rates in a couple of weeks.” After that, investors “will shift their focus to corporate balance sheets as earnings season kicks into gear.”

Traders didn’t bother to wait for the earnings data to come in. Led by technology stocks, and especially the “Magnificent Seven” (Nvidia, Apple, Microsoft, etc.), the major stock market indices surged higher this past week. The NASDAQ was particularly frothy and is getting close to revisiting the 16,000 level from November of 2021.

This happened before any of the “Magnificent Seven” reported their second-quarter earnings results, so investors aren’t even waiting for the data anymore. The prevailing sentiment now is “buy now, ask questions later,” with risk-on assets leading the way just as they’ve done all year long.

Furthermore, the dollar is losing ground, and that’s positive not only for large-cap stocks but also precious metals and cryptocurrency. The gold price chart above shows the continuation of a steady pattern: each dip is followed by a step higher, and the next step should be above the key $2,000 level.

Silver just breached the important $25 level, and the $28 resistance level from 2021 is the next target. Speaking of breaching important levels, Bitcoin recently peeked its head above $30,000, a stubborn resistance level since April.

As the old saying goes, “resistance is futile.” After an unusually strong run in 2021 and 2022, the dollar is normalizing in 2023, and that’s bound to give a boost to gold, silver, and Bitcoin. This will also lift some stocks, though the “Magnificent Seven” might not be so magnificent in the second half of the year.

That’s because the market eventually functions as a weighing machine that sorts out the good values from the bloated high-flyers. For the time being, however, the commentators will cheer the inflation numbers, and just about every risk-on trader will get a lift whether they really deserve it or not.