The Inflation Puzzle – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

All the indexes lost major ground last Thursday, with the Dow Jones Industrial Average giving up 530 points, or 1.4%. Both the Nasdaq Composite and the S&P 500 were off 1.2% and 1.4%. Friday the ‘bleeding’ stopped as the monthly Jobs Report stroked a turn-around, with the Dow Jones jumping 400 points after being thrashed on Thursday. Friday did finish up, as all three indexes, including the Russell 2000 closed a flat week on a high note. Recession concerns have faded as the ‘Labor-Led’ economy is able to adjust to negative Fed comments. “It’s amazing to see the resilience of the U.S. labor market,” said Mona Mahajan, principle and senior investment strategist at Edward Jones. Again labor is a key component of the U.S. economy, never wavering from the onset of the pandemic, deriding recession conversation. ‘And a thorn in Mr. Powell’s side.’ Oil began to move in earnest last Thursday and Friday moving up to $87.00 a barrel, with Brent crude above $90.00 a barrel. With stronger oil, gasoline prices will follow, as the travel season approaches. The Japanese yen has slowly weakened the past three years, now at its lowest value to the dollar, as inflation has run amok. The Japanese government and major domestic banks have finally come to grips with years long fiscal irregularities

The much awaited release of the CPI (Consumers Price Index), by the Bureau of Labor Statistics on Wednesday, will highlight March’s inflation activity. Trading Monday and Tuesday was slow-motion as the market was choppy, unable to motivate any kind of a rally. Commodities were the lone spot of optimism as copper and gold lit-up the sector. Copper was up 0.2%, adding to its near 10% gain for the year, while gold edged to new highs, eclipsing $2,360…. a new record.

Wednesday’s release of the CPI stalled the market, as if revealed inflation is still running hotter at 3.5% year over year for March, up from February’s 3.2%. The CPI numbers have not come down in January, February and now March, reversing the previous effectiveness of the Fed’s rate increases. “The hot start to 2024 is basically telling the Federal Reserve they are not getting that consistent downward movement towards the 2% that they want to see,” said Victoria Fernandez of Crossmark Global Investments, speaking to Yahoo Finance. Bonds were stronger after the CPI announcement, up 20 basis points, floating to a high of 4.57%, as stocks were weak in all sectors. Oil stayed strong at near $90.00 a barrel with the shiny commodity (gold) steady at $2,360.00 an ounce, showing no signs of weakening.

The PPI (Producer Price Index) released Thursday was up slightly at 0.2% for March, well below predictions of economists. Even the “year over year growth” of 2.1% was under the ‘experts’ forecasts. Stocks were unsteady, with the Dow Jones Industrial Average slipping 0.2% while the tech-heavy Nasdaq Composite was up 0.7%. As expected the Treasuries picked up steam trading at the close of Wednesday’s high mark off 4.57%

Electric Vehicles Quagmire…..The battle lines are clearer as Ev’s are being ‘eaten-alive’ by Hybrids. Sales of Hybrids jumped 50% in January and February, suffocating EV sales. The gasoline/electric Hybrid sales have drained dealer lots, with customers willing to wait on dealer deliveries, often taking 4 to 12 weeks for inventory to refresh. According to Cox Automotive, Hybrid sales are up 40% over the last five years, with huge gains this year (2024) of 13%. Bottom line Hybrids are selling three-times faster than EV’s, according to Edmunds. Customer EV concerns are numerous: restricted range, battery maintenance, and fears of battery reliability, resale, installation of charging facilities and excessive retail price. The Big Three are scrambling, rethinking deadlines for 100% conversion to electric vehicles, and slowing estimates. Sadly many fledgling EV start-ups are suffering cash shortages, consumers reluctance to pricy vehicles, all the while investors are seeing their investments now worth pennies on the dollar.

RUMBLINGS ON THE STREET

Jerome Powewll, Fed Chief, WSJ, “The economy actually isn’t becoming tighter, which it ordinarily would. It’s actually becoming a little looser and you’re seeing inflation come down–very unusual situation.”

Janet Yellon, U.S. Treasury Secretary, WSJ “China is too large to export its way to rapid growth,” Treasury Secretary Janet Yellon said in Guangzhou. “And if policies are oriented only at generating supply and not also at generating demand, global spillovers will result.”

Alex McGrath, chief investment officer for NorthEnd Private Wealth, WSJ “You flash back to earlier this year and everyone was like ‘we’re getting 6 rate cuts,’”and thgat seemed beyond optimistic at best,” said Mr. McGrath. “One might be the max we see this year because inflation’s not going any-where.”

Brad McMillian, chief investment officer for Commonwealth Financial Network, WSJ “The bond market has tended to be pessimistic, thinking that the economy will roll over and inflation will stay high. The economy isn’t rolling over, but inflation is staying high.”