Steering Clear of Recession Waters – Is The Fed’s Parachute Ready?
Chart: SPY 1-year daily
The markets are making a very nice jump up this week. CPI and PPI came in at levels that suggest a slowing economy. The Fed will need to be awake at the wheel so as not to throw us into a recession. We have been positioned well with the current run up. Commodities, or hard assets, were leading the way early this year, but that has switched as hard assets are slowing, and tech and growth stocks are now taking the lead.
Following a softer-than-expected May CPI inflation report yesterday, producer price inflation also surprised to the downside today. It provides a reprieve from faster price growth in the first few months of this year and suggests that PCE inflation, which is the Fed’s target, will also likely ease. Continued moderation in inflation creates room for a Fed rate cut later this year.
On Fox Business last week, we mentioned the market is broadening out and we are looking at other areas outside of the Magnificent Seven that have the potential to be very strong investments. As yields and inflation comes down, we anticipate investors to come off the sidelines and participate more in market.
Chart: QQQ 3-month daily
The Producer Price Index (PPI) for final demand fell 0.2% in May, the most in seven months, and contrary to the consensus of a 0.1% gain. It was driven by a 4.8% drop in energy prices, also the most in seven months. Gasoline, specifically, fell an even larger 7.1%. Food prices slipped 0.1%, down for the second consecutive month. PPI ex-food and energy ticked up by less than 0.1%, below the consensus of 0.2%.
Core goods PPI rose 0.3%, while services PPI was flat. Within services, trade margins edged up 0.2%, but transportation and warehousing prices fell 1.4%, the most in over a year.
On a y/y basis, PPI edged down to 2.2% from 2.3% in the prior month, while core PPI eased to 2.3% from 2.5%. Pipeline price pressures, however, were mostly up across the production flow, posing a risk to further disinflation.
Additionally, the PPI for final demand personal consumption also picked up to 2.8% y/y, the most since February 2023. This PPI aggregate correlates strongly with the CPI, and its near-term trend suggests CPI inflation may struggle to come down in the months ahead.
Initial claims for unemployment insurance increased 13,000 last week to 242,000, contrary to the consensus of a modest decline to 225,000. This was the third consecutive rise, pushing up claims to the highest level since August 2023. The four-week average picked up 4,750 to 227,000, the highest read since last September. Although the level of claims is still within its two-year range and low by historical norms, the recent pickup suggests some softening in labor demand.
