The Dividend Cafe - The DC Today - Wednesday, July 12, 2023

Episode Date: July 12, 2023

Although closing off the highs, stocks and bonds rallied today on cooler-than-expected CPI data, with the headline now at 3.0% year over year. With a 90% chance in fed funds futures still pointing to a 25bps rate increase in two weeks, it was as interesting to see the expectations for a rate cut pull forward from May of next year to March. Today's Post - https://bahnsen.co/43hXzMY 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. Hello and welcome to DC Today. It is Wednesday, 12th of July, coming off of a nice little market rally today, although quite a bit off. We were up something around 300 points or so this morning and still closed up about 86 points in the day,

but drifted a little lower, at least in stocks. Bonds caught a bid today, pretty much across the board. Yield curve flattened a little bit with two-year yields up a little more than 10-year. And all of that was related to inflation data that we got on the day from headlining Core CPI. So Core CPI was expected to go up something in the neighborhood of 0.3% for the month, and it went up 0.2, so less than expected. Year over year was annualized at 3%

versus 3.1, which was expected. So again, cooler than expected with core. So X food and energy now in the fours. So we've got a 4.8% year over year core reading on CPI. So positive, in my opinion, for the day. Markets are always a little bit in anticipation of a number that could be bad, a little bit of a discount price then. So you saw that kind of come out. Markets rallied a bit, both in stocks and bonds. All in all, not a negative, a lot of negative to say on the day. If you take those numbers or inside of that number, inside of CPI, some of the notable movers, energy actually was up on the month.

It had been down in the last read, like three and a half percent. So it was up 0.6% inside of this number. So you hit a little rise in energy prices, which in my opinion is a good thing, indicative of growing economy and things. You had airline services come down quite a bit. I think it was 8%, 8.1% for the month, which is 14% year over year. So a big decline in airline costs as sort of that most likely travel is kind of coming back in line with more normalcy. But all that to say, if we look back a year ago, inflation, and actually like literally a year ago, meaning as of today, inflation peaked at around 9.1% CPI. So we've come a long way.

And I wrote this in the blog there. If we would have gone back a year ago and said with inflation at 9%, if it came down 6% from there, so from nine to three, back then the 10-year treasury was a little over 3%. Where would longer term or 10-year treasury be in that scenario with inflation coming down that dramatically over the course of a year? It's about the same. It's up a little bit, but just goes to show it's hard to predict at least longer term inflation expectations, which is really what longer term rates are with shorter term stuff coming down so much as it has. We still have, even after today's inflation read, there's like a 91% chance of a Fed hike

on the 26th of July, which is two weeks from today, two weeks from tomorrow. So that's pretty much priced in. And I'm sure that they'll take advantage of it. It's hard to say with absolute certainty, but I would guess with a 90% chance they'll go ahead and do it. But then after that, it really drops off. And so basically, Fed futures are saying that we've peaked out on rates as of two weeks from tomorrow at a rate of five and a quarter to five and a half. I wrote a little bit, if you looked at longer term rates, again, back to the 10-year example of inflation going from nine to six and 10 years staying about the same, I wrote a little bit, if you looked at longer term rates, again, back to the 10 year example of inflation going from nine to six and in 10 years staying about the same, longer term rates tend to peak after inflation. So hard to say exactly, but it wouldn't surprise me if you

started to see at some point in the near future, longer term rates actually drift a little lower here as we kind of go through the cycle. All that to say, we have earnings season coming out. as we kind of go through the cycle. All that to say, we have earnings season coming out. The big banks will kick us off towards the end of the week. There's about a 6.8% decline expected broadly in earnings. And I would take the over on that. I think they'll actually do better than that decline,

which could bode well for stock prices. Also, as we get earnings that come out, the yield curve today was a little less inverted. We were north of 100 basis points on two tens or something right around high 80s at this point. So all these things are sort of indicative of, frankly, a bit of a soft landing. We haven't seen a real big shoe to drop. Credit spreads are hanging in there pretty well. I believe earnings that are going to come out here coming over the next couple of weeks will be a little bit better than what is expected just because the expectations are low. And so I don't I don't have a whole lot of doomsday here to share with you.

You know, rates are going to kind of peak out here. It looks like it looks like we've hit peak inflation. That's kind of starting to come down. So so more more to come on all of that. But suffice it to say, somewhat quiet day off the highs, a little bit of a rally here into the day. We have jobless claims out tomorrow. There's also PPI data that'll come out tomorrow as well. So we've got a couple of things on deck in the economic calendar. And with that, I shall let you enjoy your evening.

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