Market Puts a Positive Spin on April CPI

President Biden met with congressional leaders at the White House yesterday to discuss the debt ceiling and nothing was agreed to other than to meet again on Friday. The good news, we suppose, is that they are still talking. The frustrating news is that no one is communicating news of an agreement that would take a debt default off the table as a market risk factor.

Granted there have been assurances that “we will not default on our debt,” but that talk remains cheap relative to the massive cost of not taking action in time to raise the debt ceiling before the extraordinary measures being employed now by the Treasury Department to pay the nation’s bills are exhausted.

The stock market for one isn’t giving in to the worst-case scenario. It is holding fairly steady all things considered, pre-occupied more it seems with what the Federal Reserve is — or is not going to do — with its monetary policy.

Accordingly, it is choosing to pay more attention at the moment to the April Consumer Price Index (CPI) than it is to the partisan posturing over the debt ceiling, resigned to accept the idea that the historical record shows the debt limit is always increased in spite of the partisan posturing that pre-dates a projected X-date.

The material risk of course is that this time is different, yet the stock market’s behavior to this point implies that a default is still seen as a low probability.

Coming back to the CPI data, the stock market has seen it initially in a positive light even though core inflation had a sticky dimension to it. The futures for the major indices were showing modest losses in front of its release at 8:30 a.m. ET, but they shot higher as the headlines hit while Treasury yields shot lower.

Total CPI was up 0.4% month-over-month (Briefing.com consensus +0.4%) and up 4.9% year-over-year, versus up 5.0% in March. Core-CPI, which excludes food and energy, was also up 0.4% month-over-month (Briefing.com consensus +0.3%) and up 5.5% year-over-year, versus up 5.6% in March.

The index for shelter (+0.4%) was the largest contributor to the increase in total CPI and core-CPI; however, the 0.4% increase was the smallest increase for the shelter index since January 2022.

The key takeaway from the report as far as the market is concerned is that the moderation in inflation, coupled with the moderation in the shelter index, should at least spur the Fed to entertain keeping its policy rate on hold when it meets again in June.

That optimistic view is filtering through the capital markets.

The U.S. Dollar Index, up 0.2% earlier, is now down 0.3% to 101.31. The 2-yr note yield, sitting at 4.05% just before the release, is now at 3.96%, down four basis points from yesterday’s settlement. The 10-yr note yield, sitting at 3.51% just before the release, is now at 3.46%, down six basis points from yesterday’s settlement. There is an 85.8% probability of the Fed holding rates steady in June, versus 78.8% yesterday, according to the CME FedWatch Tool.

The S&P 500 futures, down five points just before the release, are up 32 points and are trading 1.1% above fair value, the Nasdaq 100 futures, down five points just before the release, are up 117 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures, down 57 points just before the release, are up 156 points and are trading 0.5% above fair value.

—

Originally Posted May 10, 2023 – Market puts a positive spin on April CPI