No, Prices Are Not “Going Down”

President Biden has pointed to recent inflation data as evidence that prices are falling (Hint: they're not).

The S&P 500 edged up a bit today, marking an increase from yesterday’s session which gave bulls a fresh record high. The Dow Jones Industrial Average wobbled near break-even, while the Nasdaq Composite dipped by 0.1%.

Following the unexpectedly high CPI, which didn’t shake the stock market much, analysts anticipated a modest uptick in Producer Prices month-over-month but a slowdown year-over-year for January. Instead, PPI followed CPI’s lead, jumping 0.3% month-over-month against a forecasted 0.1%, which brought the yearly increase to 0.9%. This was hotter than the expected 0.6%, even though it was a drop from December.

Under the surface, the news was even less encouraging with PPI excluding food and energy up 0.5% month-over-month, against a prior 0.2% and an expected 0.1%. Excluding food, energy, and trade, it rose 0.6% month-over-month, far above the 0.1% expectation. This marked the largest beat for Core PPI since January 2021. Core PPI hit a new high, up 17.4% since Biden took office, a stark reminder that disinflation doesn’t equate to falling prices.

Services PPI saw a significant monthly jump, and while energy has been pulling prices down, its effect is waning. Year-over-year, Services PPI is picking up pace again, jumping to 1.47% from 1.14%. Energy’s deflationary role is diminishing. This spells trouble for those betting on disinflation and challenges President Biden’s narrative that ‘prices are coming down’.

The 10-year Treasury yield leaped past 4.3% after the PPI news broke. The 2-year Treasury yield hit 4.7%, reaching its peak since December. It’s been a whirlwind week for the markets as investors ponder the U.S. economy’s path and the Fed’s rate cut timing. On Tuesday, the Dow faced its steepest drop in nearly a year when the January CPI came in at 3.1%, above the 2.9% forecast.

However, the market bounced back the following two days, with the S&P 500 hitting another record high yesterday. But today’s PPI report has reignited worries that the Fed might postpone rate cuts till later this year.

This kind of data suggests that traders should prepare for more ups and downs soon. Until not long ago, the general belief was that rate cuts would kick in during the first half of the year. Now, it seems more probable the Fed will hold off until the latter half. The market’s current volatility reflects a struggle between persistent high inflation, suggesting no immediate rate cuts, and strong earnings, fueling optimism for a ‘soft landing’ (or even ‘no landing’).

This week’s market fluctuations threatened to end a five-week winning streak. The S&P 500 is currently up 0.1% for the week, the Dow might end up 0.3% higher, but the Nasdaq is looking at a 0.6% fall.

In company news, Nvidia remained in the spotlight today following another highly positive analyst prediction, this time from Loop Capital, forecasting it might surpass $1,200. Applied Materials saw an 8% jump after reporting earnings that beat expectations.

On the downside, DoorDash shares fell 9% due to a loss wider than anticipated. Conversely, Trade Desk soared about 19% after surpassing fourth-quarter revenue forecasts and sharing a positive outlook for the next quarter.

With Nvidia’s earnings approaching next Wednesday after the market closes, traders are once again at a potential ‘make or break’ moment. Today’s Nvidia upgrade only upped the ante further, which could make an earnings miss potentially disastrous for the top-heavy market.


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