The Dividend Cafe - The DC Today - Tuesday, November 14, 2023

Episode Date: November 14, 2023

Today's Post - https://bahnsen.co/47wGQI7 Markets rallied huge today as bonds rallied in the aftermath of the CPI report. Interest rates went into total free fall (the 10-year is down a stunning -18 basis points, and the entire 2/10 curve is down 18-21bps in what may be the biggest bond rally of the year and possibly several years) as the CPI number came in at, wait for it, +0% month-over-month (headline inflation). The core number (excluding food and energy) was +0.2% on the month versus +0.3% consensus expectations. Year-over-year, the core CPI was +3.2% versus +3.3% ex-expected. But there’s more. Rent growth is being measured as +6.8% on the year and rent of primary residence +7.2%. Both are down +1% from recent highs but a minimum of 4% too high versus real-life “current market” metrics. That means assuming 3% shelter inflation (I am being very generous) at a 34% weighting, the 1.35% attribution coming off CPI brings headline inflation to 1.85% and core inflation to 2.65%. So, yeah, the Fed is about to take the credit. And the right teed it up for them. Ay yi yi. Money supply (as measured by ODL – Other Deposit Liabilities– the best measure of available money in the system for a lot of reasons) has declined now for three straight years. We know it flew higher post-COVID. We know about lags and monetary aggregates and all that jazz. All excess liquidity created out of COVID has been evaporated from the system. And yet, over $1 trillion of debt next year will mature and be re-borrowed at 3-4% higher in cost (as things stand now). And for those who choose not to roll over debt (many companies, some individuals, zero governments), cash reserves will be used (that, my friends, is what you will call lower velocity). 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 Tuesday edition of DC Today. I picked a good day to have this be my last DC Today for the day, for the week rather. day to have this be my last DC Today for the day, for the week rather. Brian Saitel will fill in for me tomorrow, Wednesday, as I am off to Dallas. And actually, you know what, I think I am doing it Thursday back in California, so I take that back. But I will be in Dallas tomorrow, Wednesday, and then back to California from Dallas Thursday, doing DC Today and then doing Div Cafe on Friday. from Dallas Thursday, doing DC Today, and then doing Div Cafe on Friday. And yet the reason I say today being a good day is the CPI report came out early this morning before the market opened,

and it gave the bond market the excuse to rally that many feared the opposite could happen. And so it wasn't just merely that headline inflation came in at zero percent month over month. The CPI, both in core and headline, moved less than expected, both the month over month data, but also what that meant for the year over year. And there was also a little building anxiety that not only would it not be better expected, but it could be worse than expected. And so you did have, I think, a fair amount of today's equity market rally representing short covering, where shorts had come on saying, what if the core number comes in at 0.4% instead of 0.3% expected? And so they put some short positions on in anticipation of that. It didn't happen. And in fact, it came in at 0.2 instead of 0.3 expected. And then that caused bond yields to drop nearly 20 basis points from the two year all the

way up to the 10 year on the yield curve. And that just resulted in a huge bond rally that turned into a huge equity rally. And some of it must have been shorts getting their faces ripped off, as we are prone to say in my business. Every sector was up on the day. Energy was the worst performing sector, was only up 0.54%. But listen to this, the real estate sector, publicly traded REITs and things were up 5.3% on the day. And so it's obviously been a beleaguered sector with higher interest rates for the year, but to see, that's why I think

there had to have been short exposures that had built up that caused that kind of rally. So yeah, the 10-year treasury is now down a full five basis points below four and a half. And it was just a few minutes ago, it feels like, that we were at the 5% mark and now we're at 4.45%. So a massive move higher in bonds.

The Dow was up 500 points, one and a half percent. The S&P was up just shy of 2%. The NASDAQ was up over 2.3%. Within the CPI, it really was basically about as benign as it can get. I mean, more or less, the disinflation that we've been talking about for over a year continues. Yeah, look, headline inflation is cheating a little to say 0% month over month because you had gas prices down quite a bit. But even when you strip out food and energy, core prices were up less than expected. And the contribution from shelter, I want to get this right, rent growth came in at 6.8% year over year. If you believe that, I'll tell you another one. The rent of primary residence came at 7.2. Those two together formulating 34% of the shelter waiting. So you're getting roughly

about a 7% of 34%, right? In the CPI. That equates to an attribution of 1.35% of the CPI. So if you were coming in at a headline level of three plus change and core was coming in at four, exactly four on the nose, that means that headline inflation, if you were assuming 3% shelter, which I think is high, but even if you assume three, you're really at about a 1.85% year-over-year headline inflation, and you're at about a 2.6% year-over-year core inflation. So that's why the bond market rallied, and that is why equity markets rallied with it, okay? Pretty simple day. Oil was flat on the day. Every sector up.

We went through the indexes. I strongly recommend you read the Ask David in D.C. today. Producer prices will come out tomorrow. President Biden will meet with President Xi tomorrow. Never a dull moment. Thanks for listening. Thanks for reading. And thanks for watching the D.C. Today. 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. Thank you. opportunities referenced herein will be profitable. Past performance is not indicative of current or

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