Are CPI Adjustments Positive?
Macro Perspectives
Wall Street’s major averages showed minimal movement on Thursday afternoon, with the S&P 500 hovering near the 5,000 level.
The Dow Jones slipped into positive territory, whilst Nasdaq 100 traded near flat, buoyed by strong performances in chip makers.
Initial claims for last week were recorded at 218K, slightly below forecasts.
On the earnings front, Walt Disney's shares surged over 12%, heading for its best day in three years, after the company raised its guidance and earnings surpassed forecasts.
Arm Holdings also jumped by over 50% after issuing a robust profit forecast.
As we discussed last month, the trend that dominated much of last year has returned, with divergence between the performance of big tech stocks and small cap (and value) stocks.
The Nasdaq is on new record highs, led by the dominant tech stocks that are building and delivering the first waves of generative AI. Meanwhile, the Russell 2000 (small caps) is down on the year, though less so after yesterday. The nearly 9% divergence started to slowly close with the Russell 2000 up 1.7% on the day whilst Nasdaq was relatively flat.
The performance divergence isn't just small cap related, it's broad-based, as it was for much of last year - if we look at the equal-weighted S&P 500, it's up just half a percent on the year.
Note though the performance divergence between "big tech and the rest" narrowed aggressively over the final two months of 2023. It was triggered by Jerome Powell's signal that the tightening cycle was over (late October).
At this point in the New Year, the view on the direction of rates remains clear, but the view on "when" and "by how much" has changed. The view has adjusted to two, if not three fewer cuts this year and that adjustment in market expectations has been deliberately manipulated by the Fed.
The higher the borrowing cost, the stiffer the headwind (at the moment) for most companies not innovating on the leading edge of the next industrial revolution. Â
So, with that in mind, the interest rate market is now leaning in a direction that creates the opportunity for a positive surprise. In this case, a positive surprise would be (more) weak inflation data, which could influence the Fed to lose its "patience." We have two inflation data points coming over the next five days. Today, the Bureau of Labor Statistics will publish the revisions to its CPI seasonal adjustments - these are adjustments that can change the CPI data for the past five years.
That's a big deal - a big enough deal for both the Fed Chair and Fed governor (Waller) to recently emphasise it as something that could "change the picture on inflation." They both pointed to the adjustment last year that reflected hotter than previously reported inflation data.
So, clearing that hurdle today, with no adverse adjustments to the current inflation trajectory, would be a positive for rate cut outlook.
And then we get the January CPI report next Tuesday.Â