The Bureau of Labor Statistics will publish CPI, PPI, and index of import price figures this week. In keeping with our patient style, we will not offer stock option trade suggestions until we see the numbers and observe how the market reacts.
The reason is simple. These macro numbers are full of emotion as people try to figure out how they might impact monetary policy by the federal reserve. The following table shows the number reported.
The headline number came in at +0.4%, which the market expected. The efficient market hypothesis tells us that the stock and bond markets should not respond to the announcement. However, as shown in the exhibit below, stock and bond prices (yields down) are up.
Was market participants looking for something worse? Hard to say. But we find market action is often random when prominent macro figures are released. As a result, we usually watch the action from the sidelines and then pick 0ur spot.
The economics community focuses on the CPI, PPI, PCE, etc., ex-food and energy. The stated reason for doing so is so they can tend to be more volatile than the overall index. We have a more cynical view because food, energy, housing, and medical care (and taxes) are the most significant expense items we, as humans, face. So the economics community like to ignore them when they are up and heap praise on them when they are down. This is what the BLS had to say about “core” inflation.
“The index for all items less food and energy rose 0.4 percent in April, as it did in March. The shelter index increased 0.4 percent over the month after rising 0.6 percent in March. The index for rent rose 0.6 percent in April, and the index for owners’ equivalent rent rose 0.5 percent over the month. The index for lodging away from home decreased 3.0 percent in April after rising in each of the previous four months. The shelter index was the largest factor in the monthly increase in the index for all items, less food, and energy. Among the other indexes that rose in April was the index for used cars and trucks, which increased 4.4 percent, and the index for motor vehicle insurance which increased 1.4 percent. The indexes for recreation, household furnishings and operations, personal care, apparel, and education also increased in April. Several indexes declined in April, led by the airline fares index, which fell 2.6 percent over the month after rising in February and March. The index for new vehicles declined 0.2 percent, and the index for communication decreased 0.1 percent in April. The medical care index was unchanged in April after falling 0.3 percent the previous month. The index for hospital services rose 0.5 percent over the month, after a 0.4-percent decline in March. The prescription drugs index increased 0.3 percent in April, while the physicians’ services index was unchanged. The index for all items less food and energy rose 5.5 percent over the past 12 months. The shelter index increased 8.1 percent over the last year, accounting for over 60 percent of the total increase in all items, less food and energy. Other indexes with notable increases over the last year include motor vehicle insurance (+15.5 percent), household furnishings and operations (+5.3 percent), recreation (+5.0 percent), and new vehicles (+5.4 percent).”
Investors are relieved that the numbers will not force the Fed to raise short-term rates soon. We will see if prices hold up throughout the day. Further, we will wait to see if tomorrow’s PPI numbers support the “pause” thesis. If not, they may reverse today’s price action. If they do, they may support further rallies.
