The June Consumer Price Index was lower than expected, but the Producer Price Index was higher. Stock traders responded by selling rising stocks and buying falling stocks.
The CPI inflation rate fell more than many expected, due to lower prices for necessities like gasoline and groceries, and a dramatic drop in new rental prices. This information may help ease people’s fears about inflation. Prices for most necessities finally seem to be leveling off year-over-year, after constantly rising as they have been for the past few years.
Despite this positive news, wholesale prices rose 0.2% last month, driven by rising services prices, offsetting a decline in commodity prices. The PPI figure for May was also revised upwards. However, the CPI news outweighed disappointing PPI data released by domestic trading desks.
The way for inflation data was paved this week by testimony before Congress from Federal Reserve Chairman Jerome Powell, who said in testimony before the Senate Banking Committee on Wednesday that “as we get further and better data, our confidence will increase that inflation is on a sustained track toward 2 percent.”
Another bright spot came the following day, when Chairman Powell appeared before the House Financial Services Committee for its semi-annual hearing, where he suggested a rate-cutting environment was on the way, citing a slowing job market and saying the Fed had been focused on inflation but was now paying more attention to the labor market.
Recent labor market data has shown a decline in employment. Chairman Powell made it clear that he and the committee are increasingly aware of the risks posed by a weakening labor market. His comments helped stocks perform well for much of the week, and the inflation report came as a real boost.
Based on Chairman Powell’s testimony and sobering CPI data, expectations of a rate cut by September soared to over 90%. As a result, both the US dollar and bond yields plummeted. But at the same time, a major shift occurred as momentum and program traders sold the dozen or so large caps that had pushed the average up and bought up a lot of precious metals, China, emerging markets, small caps, industrials, real estate and other sectors.
All of the above sectors would benefit most from a weaker dollar, lower interest rates, or both. If this trend continues, this could be good news for the health of the market. I have written about the concentration risk (too few stocks rising) that has plagued the market for the past few months. For the market to continue to rise, the number of stocks joining the rally needs to spread out.
If the market shifts some of the FANG/AI holdings to other stocks and commodity areas, we will likely see a period of consolidation and volatility in the market. I expect a higher high in mid to late July followed by a period of consolidation. At this point, I am on target and awaiting further developments.
Bill Schmick is listed as an investment advisor representative for Berkshire Onota Partners Inc. He can be reached at 413-347-2401 or by email at billiams1948@gmail.com.
