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Why CPI is Actually a Hawkish Sign

June 13, 2024
Frank Cabibi

Yesterday's inflation data came in cooler on all fronts, relieving investors of the interest rate pressures as the anticipation of interest rate cuts grew. However, FOMC's dot plot is now only expecting one rate cut this year, as opposed to three. Here is why CPI was not good enough for relief.

Gold holds strong

One reason that CPI did not really give us a clear indication of decline is because we are pretty much at the same spot we were in last year in June. Inflation has remained elevated above 3% for a year. This should be enough to tell us that cuts are not necessary and could actually cause more damage if we see one this year.

Gold is still bullish despite a steady jobs market. Keeping rates higher for longer is not a good sign for gold either, but the metal may be a hedge against the market and the dollar. The good news is the Fed will have to cut at some point, and either way, the dollar will weaken. Which is why gold remains strong.

Stocks may run out of steam

I have reason to believe that the Fed will not cut at all this year due to our sticky inflationary environment. Rates should remain elevated until CPI can dip under 3% and we see a promising trend lower to 2%. If they continue to stay above 3%, rates should stay above 5%.

This will continue to put pressure on earnings, jobs, mortgage rates, spending, etc. And eventually, something will crack. The US is in the middle of a race to see which cracks first: inflation or the economy. Large pools of money are already exiting the market while the US indices remain at all time highs. I don't think this is sustainable, and that the price of stocks should not be this high. The market may continue to run for now, but higher rates are going to catch up to us. And you don't want to be on the top floor when the building collapses.

Tech bulls are living in a fantasy world

Regardless, the NAS is still a bullish signal on the EdgeFinder. This is because higher NFP and lower CPI are bullish scores. But we have to keep in mind that the unemployment rate is still on the rise, at 4%. JOLTS has been on a steady decline for a year. If the trend of our labor market continues to decline and interest rates won't budge, it's only going to hurt the bulls more when the market corrects.

I'm not certain of the magnitude of this looming correction, but I know the market is due to give back some of its gains thus far. Earnings season is done in the US, the hype is over with, and we are left with only one expected rate cut this year. The projected rates were revised from 3 cuts to 1. So who's to say that it won't be revised again to zero cuts this year?

Retail Spotlight

For once, retail might actually have it right. Not being bullish on stocks at all time highs is generally a good rule of thumb as they are probably waiting for a pullback. However, they could be too early in the trade, and stocks could continue to defy gravity.

Smart Money Spotlight

Smart money is also decreasing its long stake in the S&P 500 as with retail. This mass exiting of the stock market could signify lower volume in the summer months, but it could also suggest that we are running out of buyers.

Fundamental Spotlight

Last June was 3% inflation. Since then, we've been up and down elevated above 3. If you look at this chart, you can see that we really haven't moved anywhere or seen any progression to lower CPI. People want to see the Fed cut so bad, but they don't realize the damage that could cause to what's already looking like a problem in the US economy.

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