All but the newest investors should be familiar with the phrase “buy the rumor, sell the news.”[i] Every trader I know has a story about how a stock or the overall market rose in advance of a widely anticipated event, only to see a sell off when the good news was released. The same logic applies in reverse. There are many times when we see selloffs ahead of widely anticipated bad news, only to see the market rise after traders have a chance to digest it. That is the case for US equities this morning after the nervously anticipated release of the Consumer Price Index (CPI) for March.
There was plenty of reason for traders to be nervous about the latest CPI release. Last month’s 7.9% rise was the largest in about 40 years, and that didn’t include the full effect of the inflationary pressures caused by the Ukraine invasion. Economists were expecting a rise to 8.4% in the headline number, only to see it surpassed slightly with an 8.5% print. Equity futures shot up immediately afterwards. What gives?
For starters, the report was indeed a positive. While those of us who eat and drive pay attention to the overall CPI, economists at the Federal Reserve prefer to focus on the core reading, which excludes those volatile commodities. The core rose only 0.3% vs. an expected 0.5%, which is a substantial beat. Also, year-over-year real earnings were -2.7% for the hourly average and a stunning -3.6% for the weekly average. These were in comparison to last month’s -2.5% (revised from -2.6%) and -2.2% (revised from 2.3%), respectively. This is another set of numbers that is better than expected from an economist’s point of view, but not from the viewpoint of the millions of wage earners who find themselves worse off.
Although the CPI numbers could be interpreted as a positive, I find it hard to believe that they will be sufficient to dissuade the hawks at the Federal Reserve from advocating for a 50-basis point hike at the next meeting. For starters, even though the core number beat estimates today, it still shows a 6.5% rise on a year-over-year basis. That is well above the Fed’s 2% inflation target. Furthermore, the other part of the Fed’s dual mandate is full employment. Even though the payrolls data shows something approaching full employment, the Fed must be cognizant of the fact that most Americans are finding that their wages are being eaten away by inflation. Fed policy must take these factors into account. Markets overshoot. That’s a normal facet of market behavior. US equities closed near their lows yesterday, partly on fears of a worse than expected inflation and partly because of the impending tax deadline as I theorized yesterday. It now appears that traders may have overshot on the positive side this morning too. As I write this, we have given back about half our early gains. That’s trading. That’s volatility. And that’s also part of sell the rumor, buy the news.
[i] Some say, “buy the rumor, sell the fact.” Same thing.
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