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

Episode Date: July 13, 2023

Today's Post - https://bahnsen.co/3Ddn2fV Earnings season is officially underway (companies like Delta and Pepsi released today, and a slew of big banks release tomorrow). The annual inflation rate came in yesterday at the lowest level in more than two years. The dollar is at its lowest level (against a global basket of different currencies since April of last year. Senator Warren is officially now yelling for Chairman Powell and the Fed to stop hiking interest rates (I have been waiting for a populist backlash; I just didn’t know if it would be from the right or the left first; now we know). China exports fell -12.4% last month (year-over-year), with 11 months in a row of declining exports to the U.S. Hmmmmm … Jobless claims came in at 237,000, heading south from the averages north of 250k we had been seeing! Producer Prices are up +0.1% year-over-year. +0.1%. Zero percent inflation in wholesale prices. Now, let’s be real honest about something here. This is mostly a story of what we call “trading base effects.” Last year at this time, the YOY PPI was +11%, so that number was so silly that a year later, being up +0% is less profound than it may seem. But of course, the same was true before (only on the other side of the math), where a high YOY number was a by-product of the prior year’s price collapse. And we are supposed to do calculations off of these distortions? But there is genuine price deflation in the producer prices (year-over-year) of processed and unprocessed core goods. Commodity prices are down. Supply chains have normalized. Wholesale prices have moderated entirely and are very likely heading lower based on manufacturing data. TIP spreads are showing implied inflation expectations of 1.95% for the next two years. Over five years, 2.19%. 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 and welcome to the Thursday edition of DC Today, another up day in markets and another day of some travel adventure for me. I'm actually in my hotel room in Washington, D.C. I'm going to be leaving here in a moment to go give a speech tonight. And yet I wanted to give you the breakdown of today's action. And then tomorrow I'm flying to Memphis, Tennessee, where I'm speaking. And then I get to go back to New York. So a lot of travel back and forth stuff for me

right now. And yet in the meantime, markets continue to do what they do, which is never sleep. And the markets have been on quite a bit of a tear. And today's action was again, largely related to the white of the eyes of inflation, the producer price index. Yesterday, Brian talked to you about what came out in the consumer price index on Wednesday. The producer price index came out today, and the year-over-year headline inflation rate for wholesale prices was 0.1%, basically flat, no inflation. Core goods at a wholesale level, both processed and unprocessed core goods,

have deflation over the last year, negative price movement. The market response today was primarily felt in the bond market. You had yields drop substantially, big rally in the bond market. The 10-year, which you recall had gotten above 4% on the employment report last week from ADP, is now back to 3.76%. So a really meaningful rally in bonds over the last several days. I'm going to go through a couple of different news bits, and then I'll give you the kind of market recap from today. Earnings season has officially started. That should take over one of the bigger movement of markets in the next three weeks. You had Delta Airlines and PepsiCo both released today, but now most of the big banks

released tomorrow. And then over the next two weeks, we'll kind of get the vast majority of the S&P 500 releasing. We're aware of the inflation data. I told you what the producer price index was at a wholesale level, but I want to elaborate a moment about something you're going to hear more of in the, I don't know, months, quarters ahead called base effects. I think that there is some validity to this notion of trading base effects. And what I mean by that is that a year ago, the producer price index had a year over year number of plus 11%. And so the number that today's 0% is being compared against was a very high number a year ago. And that is distortive. Okay. And yet the same was true a year ago. The other direction that the base effect of what the 11% was being looked at was against a much lower number. So you've had sort of severe movements

that then allow the year over year comparison to be somewhat distorted by the base effect, either being very high a year ago or very low two years ago, et cetera. The month of July and the month of August a year ago were much lower. And so you may have a base effect that causes it to feel a little different in a month or two from now. My point being that there is much more exhaustive data than just simply the year over year PPI and year over year CPI number available. You have monthly sequential, you can annualize three months, six months, nine months, 12 month averages. There isn't much data. I guess if you wanted to find an inflation friendly number, meaning for the pro-inflation, inflation hawkish camp, it would probably be core inflation X, food and energy, so core,

but still including shelter or focusing on services year over year. I guess that would be the number where it seems a bit stickier. But more or less, when you look at these three, six, nine month numbers with food and energy, without food and energy, especially without shelter, all of those numbers are kind of making the argument I've been making for some time. So tip spreads are the bond markets voting on what all this looks like. You right now have a two year implied inflation expectation of 1.95% for the next two years. And for five years, you have 2.19%. So very Fed-friendly inflation expectations implied in the multi-trillion dollar bond market. Other than the PPI stuff, China exports were down 12.5% last month

on a year over year basis. That's their total exports. But their exports to the United States have dropped 11 months in a row now. Jobless claims came in at 237,000. It had been at a 254,000 running weekly average just a few weeks ago. So a lot of data points coming in today. And then you get Senator Elizabeth Warren yelling that Chairman Powell and the Fed need to stop raising rates immediately. And that hasn't been happening. You haven't seen a deep level politicization. I figured that there was somebody coming. I just didn't know if it'd be from the right or the left who would strike first at wondering why the Fed is taking such an aggressively hawkish posture here with monetary policy. Anything else I want to go through? I think that the Dow up 48 points, but the NASDAQ up one and a half percent tells you kind of the risk on nature of today's rally.

Energy was actually down 0.4 percent, even though oil prices were all the way up. They're up another two percent, up to seventy seven dollars a barrel. But communication services on the S&P was up two point three percent. So you had that movement higher in some of the tech adjacentP was up 2.3%. So you had that movement higher in some of the tech adjacent areas of the market. And we talked about the rally in bonds. So that's kind of the scoop for today. All week, it's more or less been a very friendly environment

for risk assets. And I think that the expectation right now in the market is okay. It looks like the Fed is going to go ahead and do another rate hike. There are probably more people like me than not who don't understand why they are, but nevertheless, the market seems surprised that they are doing it

and that they're not going to do another one. The market has done that several times along the way here, and I've certainly done it myself several times along the way. I've been wrong and the market's been wrong. But in this case, there's a lot of logic behind the idea that they may go forward with one more hike just sort of because they've already kind of threatened to and leave it in place from there. But we'll see. There's still a couple more weeks till even that Fed meeting, let alone all the ones thereafter. So I will leave it there here for the D. the DC today.

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