Good morning contrarians!
Yesterday was another rough day on Wall Street. After an initial rally, stocks sold off into the close. Tech once again saw the worst of it, with the Nasdaq dropping 3%. S&P 500 declined 1.7% to inch closer to a bear market.
State of Play
As of 0630 0330 (somebody got his time zones crossed and woke up at 1am PT to record this) stock futures are pointing to yet more selling. The Nasdaq is down 1% with the others down a little less.
Commodities are dropping, with WTI crude down 2% to trade around $103/barrel.
Bonds are continuing to rally. The yield on the 10-year is down about 9 basis points to 2.83% whilst the 2-year is down 4bps to 2.59%. Yields move inversely to prices.
Cryptos are getting beat up. Bitcoin is down 12% to trade below $27,000. At least that’s good news if you’re trafficking memes making fun of bitcoin bros. For example
Economic Data
Yesterday we had consumer price inflation. Today it’s the turn of producers. The Bureau of Labor Statistics’ PPI reading is far less hyped than the CPI, but is arguably more important as it is more of a leading indicator (producers pass their costs on to consumers, after all).
Consumer prices may have peaked in March, and economists are expecting the same pattern for producer prices. The year-over-year PPI for April is expected to come in at 10.7%, lower than the 11.2% recorded for March. The Core PPI, which excludes food and energy, is anticipated to print at 8.9% YoY, down from 9.2% in March.
These are still gaudy numbers and honestly it’s hard to see how anybody will feel any real relief over 8.9% producer price inflation versus 9.2%. It’s still ridiculously high and the Fed is right (if late) in ratcheting up interest rates to ward off inflation.
Seeing how it’s Thursday we also have initial jobless claims. This is expected to come in at 195,000, down a bit from the 200,000 seen last week. This number has been rising a little bit lately after (apparently) bottoming at 166,000 on April 7. So watch this space. Again not quite enough to be statistically significant (one would think) but if the pattern continues…
Earnings
A few to tell you about here: Dillard’s (DDS), Six Flags (SIX), Brookfield Asset Management (BAM), SquareSpace (SQSP), and Utz Brands (UTZ) report before the open at 0930.
For more on individual stocks, be sure to listen to the latest episode of the podcast with Brooker Belcourt of Covey. This was uploaded last night and is currently available to you (premium subscriber) only. Brooker had some very interesting insights on portfolio positioning.
The Bottom Line©
The calculus with the PPI is the same as it was yesterday with the CPI: If the number is lower than the forecast we could get a relief rally. If not, we’re likely to see more selling.
One thing that is clear is sustained selling is bad for everybody. Bear markets can be quick — so can recessions. But one factor has already been removed from that equation: the Fed cannot cut interest rates if inflation is this high. In fact, the Fed can’t do anything but tighten in the face of current inflationary data. And that is the type of thing that will keep markets from recovering as quickly as they did the last two times the Fed reversed course, in 2020 during Covid and in late 2018.
It doesn’t have to unfold that way of course. Inflation could soon abate (if it hasn’t already) or the economy could chug along even with higher interest rates. But with each passing day these are looking like less likely scenarios.
Producer Prices, Pain in Crypto Land: Daily Contrarian, May 12