Has Inflation Peaked? Investors Seem to Think So

Stocks climbed higher this morning as investors mulled over the latest Consumer Price Index (CPI) reading. The March CPI, which was released before the market opened today, showed an 8.5% gain in consumer prices year over year (vs. 8.4% YoY expected) and 1.2% month-over-month (vs. 1.2% MoM expected), driven by soaring energy costs.

Analysts attempted to account for the rising price of oil in their projections. Still, the headline CPI figure beat the consensus estimate.

But if there was any silver lining to be found in last month’s inflation data, it was that the core CPI, which excludes food and energy, only jumped 6.5% YoY vs. 6.6% YoY expected. In other words, non-food and energy-related prices did not accelerate as analysts thought they would.

Rising shelter costs were the largest contributor to core CPI in March (+0.5% MoM, +5.0% YoY). Used auto prices fell 3.8% MoM but remain up 35.3% YoY.

Stocks rallied modestly despite the headline “beat” on hopes that inflation finally peaked last month, as evidenced by a drop in long-term yields.

“It’s a red-hot number but the market’s reaction, for now, suggests it’s priced in, especially with the month-over-month core read coming in below expectations,” wrote E-Trade strategist Mike Loewengart.

“The big debate is whether elevated reads like these are the new normal, or if we’re beginning to see a light at the end of the inflationary tunnel.”

Conversely, investors may also be buying back into stocks in an attempt to keep pace with inflation. It’s something we’ve discussed here in the past – the idea that equities would continue to rise nominally alongside inflation, giving the impression that things are going well. In terms of real gains, though, anyone long stocks would be losing money.

That’s assuming the Fed allows inflation to run rampant, however. If Fed Chairman Jerome Powell sticks to his guns and hikes rates as planned, inflation should fall. But so too would economic growth as the US is plunged into a recession, which would ultimately drive stocks lower.

“I think the 50-basis point raise is baked in for the next meeting because they have the clearance for that. But the bond market has moved to the point where does it matter what they raise it to? And I’d say ‘no,’” explained Bokeh Capital founder Kim Forrest.

“The bond complex has already moved ahead to comprehend what it believes the moves are going to be. And I think this is really good for the Fed and for investors. You know, we don’t like suddenness.”

Yesterday’s sudden spike in long-term yields drove growth stocks lower. This morning, growth shares popped higher again as long-term yields fell.

But shortly before noon, growth stocks gave up most of their initial gains as yields reversed and oil rallied fiercely.

Overall, the markets continue to look completely disjointed as a result. And 2022’s equity selloff doesn’t seem to be over by any means, either.

So, as we move into the second half of April, be wary of bull traps. The market hasn’t shown investors anything over the last few weeks that suggests another vicious rally is on its way. And until it does, it may be best to simply wait for stocks to generate positive momentum once more instead of trying to “catch the falling knife,” like so many have done (unsuccessfully) this month.


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