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Breakfast Bites - De-risking could lead the market higher

Hotter US CPI, Rate cuts in July, UK Inflation eases; Lyft makes a blunder; Japanese Yen under pressure

Rise and shine everyone.

What a day we had yesterday. A hotter-than-expected inflation number led to every index closing sharply lower. As yields spiked, the Russell 2000 was the worst hit, particularly the regional banks. With a weak margin profile and higher leverage, small caps are more rate-sensitive and we saw that firsthand yesterday.

Gold sold off, Bitcoin sold off and the US Dollar hit its highest level since November. The only major asset that was hanging in there was Oil. In fact, oil rallied for the better of the day closing above $77.80. Crude continues to rally this morning.

The tide has changed this morning, however, and markets are regaining some ground. It helps that most of Asia is not open so we’re not seeing a continuation of the drawdown.

We saw a lot of de-risking yesterday and some hedging to protect the downside. But, the result of that de-risking is also likely hiding out again in the Mag 7 or, maybe 6 (ex-Tesla). This could very well lead the market higher.

A couple of things to watch today: US PPI, Fed Goolsbee speaks, and Japan’s Prel Q4 GDP numbers. If PPI comes in softer, we’ll probably see some of that heat being taken off of yesterday’s CPI report.

Big Stories

Hotter US CPI

I know most people have already reported on the CPI yesterday but, it’s probably worth noting some interesting points here below the surface:

Goods inflation and energy inflation declined, which is a good sign that supply chain issues are not becoming entrenched.

The scarier part was service inflation spiked, which the Fed is always wary about. Medical Costs were up, partly due to adjustments to higher wages (which is sticky) and partly due to seasonality.

Auto insurance has been creeping higher as insurers adjust their premiums, as we’ve seen with health insurance since Q4, 2023.

Shelter inflation accelerated by +0.6%, led by Owners’ Equivalent Rent (OER +0.6% MoM and lodging (+1.8% MoM). Taken a different way Headline CPI excluding Shelter is at 1.5% YoY. This is troubling and we’ve been seeing home prices increase progressively. While leading indicators of rent show overall disinflation, some of the smaller cities are showing strong price increases. The next few months will be crucial in determining how the lags in the rent data play out.

Rate Cuts in July

A direct result of this hotter CPI number is that now the market has finally started to agree with us on the timing of rate cuts. We’ve been saying June, more leaning towards July, and I stand by that. 🙂

We’re seeing Fed Fund Futures price in the first full rate cut in July. We’re still at about 100 bps points of cut, which is 4 cuts but expectations may finally, agree with the Fed on 3.

UK Inflation

UK inflation gave us a pleasant surprise coming in lower than expected.

Year-over-year growth: ➖CPI 4.0% (est. 4.1%, prev. 4.0%) ➖Core CPI 5.1% (est. 5.2%, prev. 5.1%)

Month-over-month growth: 📉CPI -0.6% (est. -0.3%, prev. 0.4%) 📉Core CPI -0.9% (est. -0.8%, prev. 0.6%)

The GBP sold off, and equities caught a nice little bid, up +1.3%. While these numbers are still too high by most standards, we’re playing with the idea of rate cuts again. Yesterday’s wage growth coming in lower ties into this and a couple of more months of better data may lead to rate cuts in the summer.

Fun Fact of the Day

  • Lyft was over +60% after reporting earnings because their presentation showed a margin expansion of 500bps (5%). Turns out it was a typo, and the actual number was 50 bps (0.5%). Still not bad! It’s up 21.6% now.

Chart of the Day

With the USD rallying yesterday, the JPY saw significant pressure. We’ve crossed 150 for the USD/JPY for the first time this year. Throughout the day, Japanese authorities repeatedly criticized the recent fluctuations in the Yen's value as “too rapid”, emphasizing their readiness to intervene if necessary.

  • Asian stock markets fell across the board, with declines seen in Hong Kong as it resumed trading after the Lunar New Year holidays (Chinese markets remained closed for the week).

  • Softbank and Nvidia announced plans to establish an AI industry group aimed at creating global standards for AI processing through mobile network base stations.

  • In EU earnings news: Thyssenkrupp reduced its full-year forecast due to low demand and reported disappointing Q1 results; Heineken noted a weak outlook for FY23 as increased prices impacted sales momentum. Delivery Hero reported a shift to profit for FY23, while Ahold Delhaize fell short of Q4 EPS expectations but provided a positive outlook for FY24.

  • ECB’s chief economist from Ireland, considered dovish, expressed that efforts to curb inflation are moving in the right direction, indicating the next action would likely be a rate cut, though dependent on future data.

  • The German Federal Government is expected to revise its 2024 growth forecast down to 0.2% in a report to be released next week, following the German Bundesbank's reduction of its 2024 GDP growth forecast from 1.2% to 0.4%.

  • US Treasury Secretary Yellen pointed out a 6 percentage-point reduction in inflation from its peak, praising the progress in fighting inflation despite an acceleration in CPI month-over-month gains.


(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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