Inflation turns up the heat: CPI scorches expectations, Wall Street sweats

• CPI is HOT, PPI is due out at 8:30.

• Risk goes from cut to hike!

• Stocks & Bonds sell off – yields surge higher.

• Oil declines on ‘end of war’s chatter, gold churns at the heights.

• Try the Bucatini All’ Amatriciana

And it’s HOT in the kitchen…. CPI surging higher than the estimates, surprising almost everyone…. (almost is the key word) …. CPI m/m + 0.5%, and y/y of +3%. Ex food and energy? M/m +0.4% and y/y of +3.3% - all readings higher then the estimates and that sent the futures into a tail spin before the opening….(CPI on a 3 month basis rose by a stunning 4.5% - well above what the FED is targeting)…the algo’s unable to accept the fact that inflation IS rearing its ugly head, again……although many of us have been waving the warning flag for months now…..in fact – as I noted and have been saying – the PPI reports over the past 2 months have been signaling just that….and we know that higher prices at the producer level- ultimately make their way to the consumer level….and that is what happened yesterday…..Producers are NOT eating the higher prices – you are!

Now some – will say that the January report also reflects big price changes or ‘adjustments’ in the new year…..and that is true, it happens every year, so it is NOT a surprise at all….but if that is the case year in and year out, why did the estimates NOT reflect it? If everyone knows this happens – then it should have been built into the estimates and investors and algo’s and traders would not have been surprised…. Clearly – it goes beyond the adjustment – Capisce? Yesterday’s hot read was not about the adjustment at all….

Now – before you go and blame the new administration – let’s just remind ourselves – that JJ and the FOMC committee made a ‘pre-mature’ aggressive rate cut in September (which is stimulating) – just weeks ahead of the election – followed by 2 more cuts into year-end (further stimulation)….….saying that the labor market was going into distress – something that did NOT happen at all (and you could argue was NOT happening). At the time I made it clear that it was a mistake, I ranted and raved about the logic and I reminded you that in 1979 – the FED also made a pre-mature decision to cut rates because they too thought they slayed the monster – How’d that work out? (Answer- Not so good!)

Now, inflation in January rose the most since August 2023 – causing JJ to parse his words very carefully – going from dovish to hawkish at yesterday’s second day of Humphrey Hawkins testimony on Capitol Hill saying.

‘That while the central bank has made substantial progress toward taming inflation, there is still MORE work to do, so we want to keep policy restrictive for now.’

Which is very different than what he said on Tuesday when he appeared on day 1 of this testimony…. saying that the central bank needed to ‘be patient before lowering borrowing costs further as the economy remains strong….’

Note the word ‘restrictive’ is what set the two statements apart…. Restrictive (vs. patient) gives you more of a sense of control, limits or constraints which leans more hawkish rather than just ‘being patient;’ which suggests a more dovish stance…. In any event –

That’s all we needed – stocks sold off in the pre-mkt and then sold off during the day – although – the buy the dippers came in to rescue the tech names after the Nasdaq fell out of bed……..At the end of the day – the Dow lost 225 pts, the S&P fell 16 pts, the Nasdaq gained 6 pts, the Russell gave up 20 pts, the Transports lost 60 pts, the Equal Weighted S&P down 40 while the Mag 7 Index added 16 pts.

The selling in stocks boiled over to selling in bonds – the TLT down 1.4% and the TLH down 1.2% and those sent yields surging – the 10 yr up 9 bps to end the day at 4.62% while the 2-yr gained 7 bps to end the day yielding 4.35%. The move in bonds suggesting that the FED may be boxed into a corner – unable to really cut rates this year at all and in fact – the rumor yesterday was that we could see a rate HIKE rather than a CUT this year. (which apparently also caught some people by surprise). In any event – it was what it was….and today we are going to get the January PPI report - and that too is expected to tick up a bit – but after yesterday’s CPI report – many are curious if the tick might just be a bit higher than the estimates….

Already the PPI m/m is expected to be up 0.3% (vs. +0.2% last month) and PPI Ex food and energy of +0.3% (vs. 0% last month) – while y/y numbers are expected to be unchanged vs. last month…..but again – we should also be aware of what the 3 month run rate is and what the January ‘adjustments’ might be…..….so we wait as the clock ticks. PPI is due out at 8:30 am.

In addition, we will get the usual Thursday reads – Initial Jobless Claims and Cont. Claims – which will NOT be the focus today….

Oil which has been trending higher – sold off yesterday – WTI falling 2.7% to end the day at $71.35/barrel taking it down and thru 2 trendline supports at $71.92 and $71.87. …..this AFTER Trump’s conversation with Vlad about ending the Russia/Ukraine war….apparently something both Vlad (Putin) and Vlad (Zelensky) would suddenly like to do – This will give Vlad Z time to spend all the money we gave him that ended up in some Swiss bank account……and so the move in oil was all about ending sanctions on Russian oil IF the fighting stops and peace is established.

Remember that Russia is a major oil producer, so bringing them back on line will bring more supply to the markets, that will cause oil prices to fall and that will help ease inflation across the board….because the price of oil is directly tied to the pace of inflation…..lower oil prices will cause manufacturing costs to decline, transportation costs to decline, electricity costs to decline and that will be a direct benefit to the US and global economy. This morning – oil is trading down 90 cts at $70.40 – piercing the final trendline support at $70.59…. If oil continues to weaken – we could easily see it trade to down the mid to low $69’s.

Gold continues to churn at the highs…this morning it is up $15 at $2945/oz…just slightly off the highs set on Monday….Now, you’d think that the Russia story would cause gold to back off, but that may not be true…only because Gold remains the safe haven play…..and if yesterday’s CPI is any indication of pending inflation- we can expect gold to remain elevated as investors use it as a hedge. While that is true – my gut says it’s a bit tired up here…the move ytd is dramatic - +11%....this on top of last years 25% move higher….so I would not be surprised to see it churn a bit, and back off – I would not be surprised if we saw it test $2825 ish….

This morning futures are bouncing higher – after the selling yesterday….and ahead of today’s PPI report…. Which suggests to me that the market may not overreact to the report unless it is substantially higher than expected…. Dow futures are up 50 pts, S&P’s up 4, Nasdaq is up 50 pts, and Russell is up 10 pts. Now in the end – long term investors need to step back and eliminate the short-term noise…. focus on the bigger picture…. We are ¾ of the way thru earnings season and the reports have been better than expected and guidance has been strong as well. A well designed and balanced portfolio is your best defense.

European markets are also higher…on strong earnings and the idea that the Russia/Ukraine war is about to come to an end…..In addition – UK economic stats show that the UK economy grew by 0.1% (vs. the expected decline) and while that is good, the UK is down by 0.5% while all of the other market centers are up more than 1%.

The S&P closed at 6051 – down 16 pts – after testing trendline support at 6004 yesterday. This morning’s PPI will drive the next move….futures are suggesting that they are not worried……and if that is the case – we will remain in the 6000/6100 trading range….where we have been for 4 weeks now…..Now, if the PPI causes the markets to go into distress – then I would not be surprised to see us test the 5920 ish zone….but if the markets take it all in stride – then watch as we test the upper band of the trading zone….

Eco data tomorrow is all about Retail Sales, Industrial Production and Capacity Utilization.

Earnings include DE, MCO, DUK, BN, & AEP all before the opening. After the bell – look for AMAT, COIN, PANW & ROKU.

Stick to the plan, as a long-term investor - do not overreact to any specific headline that will cause you to make a short-term erroneous decision. You are invested so you are participating…. use weakness as an opportunity in good names.

Bucatini All’ amatriciana

This is a bit ‘spicey’ HOT if you will…and so it makes sense for today’s dish.

For this you need: Olive oil, Guanciale, Red Pepper flakes, dry white wine, 1 can of peeled tomatoes – hand crushed, s&p, 1lb of Bucatini pasta and of course the fresh grated Pecorino Romano Cheese.

Bring a pot of salt water to a rolling boil on the back burner so it’s ready for you.

Start by heating the olive oil over medium-high heat until shimmering. Add guanciale and pepper flakes and cook, stirring, until lightly browned, about 5 minutes. Add wine and cook, scraping up any browned bits on bottom of pan, until nearly evaporated, about 3 minutes.

Add the tomatoes – season with s&p and bring to a boil and then reduce to simmer for 15 mins.

Now add the pasta to the pot of water and cook until aldente. Using tongs, transfer the pasta to the sauté pan – adding 1 ladle of the pasta water (tears of the Gods).

Turn the heat up and toss to coat the pasta and thicken the sauce. Remove and add a handful of the cheese and stir rapidly. Serve in warm bowls with plenty of extra cheese on the table for your family.