The Dividend Cafe - The DC Today -Thursday April 13, 2023

Episode Date: April 13, 2023

Today's Post - https://bahnsen.co/43GLAdk The markets went into big-time rally mode today and, of course, had already rallied a lot from mid-March levels. The CPI number was quite disinflationary yesterday, as Trevor walked you through in the DC Today, and we saw the disinflationary report in CPI yesterday and now further disinflation in PPI today (producer prices). Headline PPI was down -0.5% on the month when no change was estimated. The core PPI number year-over-year is now +3.4%, down more than 50% from its peak level a year ago. It had been +4.8% YOY just one month ago. But the Headline PPI is now up just +2.7% from a year ago, a massive drop and substantial wholesale disinflation that screams for … A rate hike??? Dear Lord. March 2022 headline PPI: +11.7% March 2023 headline PPI: +2.7% Okay. Don’t get me started. But did the market rally today because it is now even more obvious that the Fed should not be hiking anymore? Well, if so, the Fed Funds Futures aren’t showing it (still 66% implied odds of a quarter-point rate hike). Do markets rally because of what the Fed ought to do or only what the market believes it will do? The former is unlikely last time I checked. Yet markets today clearly said some form of “risk on,” and the reality is that the Fed either gets it or they don’t. The end is near. At least for this rate hike cycle. Credit is contracting. And both stocks and bonds seem to be seeing some form of easier path ahead. Listen or watch today’s comments and check out the Ask David below for the pivotal question about the dollar everyone is asking. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up to date information and perspective on financial markets. Well, hello, welcome to the DC Today, Thursday edition, last DC Today of the week and a big, big rally day. The Dow up 383 points, well over 1%. The S&P up about 1.3. The NASDAQ up almost 2%. So while Dividend Cafe tomorrow will not get into everything happening this week in the market, we'll close out at least the Thursday with a DC Today focused on a few things happening in the economy and the market. And, you know, it's our favorite topic, this issue with the Fed and their insistence on tightening credit, tightening financial conditions while inflation is dropping like a rock.

And yesterday, as my partner Trevor Cummings discussed, and he shared some things that I had written and some other commentary he provided, that was very useful at evaluating what the CPI data said yesterday. But today we had the PPI, and I just want to do a quick refresher. CPI is the Consumer Price Index. It's reflecting what people pay as sort of a final price, the consumer price. And it could be food and energy. It could be a whole lot of other services and products and goods. But the producer prices refers to kind of inputs or wholesale prices, if you will. Both things obviously refer to the price level and the economy. And candidly, it's kind of difficult for consumer prices to be going higher when producer prices aren't,

because you would think in a perfect world that what is happening up or down and the rate at which it's happening with wholesale prices is feeding into final prices paid. So you had rather significant disinflation evidence today in the PPI number, down 0.5% on the month. But this is the data point I want to focus on, on headline PPI, which includes food and energy, 2.7% year over year producer price inflation. That number in March of last year, one year ago, was 11.7%. So that is the textbook definition of disinflation going from nearly 12% to below 3% in year over year price inflation of wholesale prices at the headline level. Now, that does include food and energy. And a lot of that disinflation is because energy prices were lower, particularly on the wholesale side of gasoline. But even when you

look at just core PPI, we are now 3.4% year over year, which again, is not only about half, less than half of what it had been, but just a month over month, that number was 4.8 year over year last month. So you had a significant decline at the core level, which takes out food and energy and at the wholesale headline level year over year. So if I haven't bored you enough yet with the overall statistics, this is the part I kind of want to get to. Did the market go up today because it now knows that the Fed is not going to raise rates next month? The futures market still is showing a 66% chance of another quarter point rate hike. So did the market go up just because it doesn't think the Fed should raise rates? I don't think that's how markets act.

Last I checked, markets price that they believe will happen. I don't think that's how markets act. Last I checked, markets price that they believe will happen. So there does continue to be a bit of tension between the rate market, the bond market, and equities. But where we are in terms of a rally, just let's call it the last month, since that kind of mid-March level is significantly higher in equities. A lot of that came the last week of March. You had another big rally here today.

And there's a lot of, I don't want to say schizophrenia, but I would say certainly lack of clarity in markets as to what is leading and why. You know, you have had low beta leading a lot of this rally, more defensive sectors, non-cyclicals. And then you've had today, the communication services was the leading sector. You had real estate actually was down 0.4%. It was the only negative performing sector today. And the NASDAQ up 2%. So you had a kind of lower quality rally today. The bond market also didn't move a lot. So it wasn't like, I mean, the bond market's

up quite a bit. But today, as equities were flying, you know, the 10 year yield was up two basis points, not a lot, but you are sitting at 3.44%. My point is that I don't think anyone could look at stocks or bonds today, or over a month or over the year and say, oh, there's this clear, obvious message to markets. What there is is a clear, obvious message from David Vonson to you that the Fed should not be raising rates again. And yet I don't think that the market is reflecting a clarity that they won't. I do believe credit, you're going to see a chart in Dividend Cafe tomorrow. I do believe credit into small business is more or less choked off into commercial real estate from the banking sector, pretty much choked off.

And unless the Fed is purposely at this point saying we want to break that part of the economy, I don't get it. If the Fed's real objective is to be able to take credit for having beat the supply side inflation that was evidenced in place before anything happened with rates whatsoever, then I think they're all ready to do a victory lap now. So why they would proceed is totally beyond me. But I have to tell you, when I do commentary on markets, what I think will happen, what does happen, why it happened, what we think will happen next, not what I think should happen. I only throw in what I think should happen so far because I am fond of the sound of one hand clapping. The other thing I did in DC Today today is answer a question. And the last thing I want to do is use this podcast to point you to another podcast, but there is a link in DC Today. I'm getting so many

more questions about the US dollar. And you know, last week's Dividend Cafe was committed to this issue with oil, OPEC Plus, and the relevance of a China-Saudi alliance and what it means to the US dollar. And people are wondering, are we going to lose our reserve currency status? And I just can't emphasize enough all of the arguments as to why that can't and won't happen anytime close to soon. A marginalizing of the dollar's power, a marginalizing of the dollar's ability as a transactional currency is totally different than what the world holds in reserves. And this idea that the world wants to hold Chinese currency in reserve when you can't get capital in and out of their country is ridiculous. And if China were to open their capital markets, they would have a trillion dollars leave that country overnight. And so how does that hold the currency strength? I need you to

unpack this better at the answer I give in DC Today. There's a link there. Fundamentally, I am very concerned about the way we behave, but unfortunately it continues to be a relative versus absolute story. We're doing dumb things to hurt our dollar, but you cannot say that those things we're doing are not being done and then some in Europe or and then some in Japan. And what is the other currency that's going to take the dollar's place as a reserve currency?

If you say China, you have to understand it's impossible when there's not a capital flow allowed out of the country. It will not happen. So therefore, we can all at once say that there are concerns with the dollar's transactional status

and strength and purchasing power and signifier to the world of what we want to be as an economic leader. All of those things are true and yet not say, oh, the dollar is about to lose its reserve currency. When someone says it to you or you read it in a newsletter or you read it as clickbait on the internet or someone on social media wants to raise money to tell you something, or whatever it is, just ask the next question. If not dollar, who? Okay, I'm going to leave it there. Thanks for listening to you. Thanks for watching. And thank you for reading the DC today. I'm looking forward to seeing you in the Dividend Cafe tomorrow. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC.

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