2% Core CPI Matches Fed’s Target

2% Core CPI - Stocks Rebound On Wednesday

So much for the potential correction because stocks were overbought. On Wednesday, S&P 500 rallied 0.35%, Nasdaq increased 0.69%, and Russell 2000 increased 1.4%. The market is once again within striking distance of its all-time high. It might even reach that level next week. S&P 500 needs to increase 1.47% to get there. It will probably gain momentum from breaking that threshold.

Even with VIX falling 6.86% to 13.3, CNN fear and greed index fell 1 point to 69 which signals greed. It’s unlikely that the market will reach an all-time high in the next few days without this signaling extreme greed. That’s not necessarily a problem. If you would have told me 4 months ago that the market would be near a record high sometime in 2019, I would have expected this index to be at either greed or extreme greed.

2 sectors that declined the most on Wednesday were the utilities and materials as they fell 0.38% and 3 basis points. This was a proper ‘risk on’ rally since the utilities underperformed. Best 2 sectors were technology and real estate which increased 0.7% and 0.73%. It’s interesting to see tech rallying since this sector is about to have one of the worst earnings seasons.

Giving us an update on the health of the consumer, Costco reported March net sales increased 7.4% yearly to $13.87 billion. Same store sales growth was 5.7%; it was 5.9% when excluding gas prices, forex, and new accounting standards. That extra shopping day in March increased same store sales growth by 1% to 1.5%. That makes the results look less great. Late Easter hurt March sales and will help them in April.

2% Core CPI - Trade Deal Closer To Getting Done

The trade deal with China and dovish Fed have helped stocks improved without a clear sign the slowdown is over.  Latest news on the trade front is that the countries are working on an enforcement mechanism so that China doesn’t cheat on aspects of the agreement. It’s very difficult to make a deal that could last decades. Important news is the countries are making progress and are in the process of finishing the deal.

Specifically, Treasury Secretary Mnuchin stated, “We’ve pretty much agreed on an enforcement mechanism. We’ve agreed that both sides will establish enforcement offices that will deal with the ongoing matters. This is something both sides are taking very seriously.” 

While the market has already more than priced in a deal, it will still be important to finally get this done, so both sides can get an economic boost. China’s weakness has driven the global economy to potentially having the weakest GDP growth since the financial crisis. That needs to change for the rally in both American and Chinese equities to continue.

2% Core CPI - CPI Nearly Meets Estimates

Rounding isn’t sexy when analyzing data, but sometimes it is important. That’s the case in the March CPI report. Monthly headline CPI was 0.4% which beat the consensus for 0.3% and the prior month’s inflation of 0.2%. 

As you can see from the chart below, yearly headline CPI was 1.9% which beat estimates for 1.8% and last month’s inflation of 1.5%. As you can see, unrounded CPI was 1.86% which means the report was 2 basis points away from meeting estimates. That’s an important distinction because some investors will see the acceleration and headline beat and panic in some way. This report supports the status quo. You shouldn’t panic at all.

Core CPI was 0.1% monthly which was the same as February and missed estimates for 0.2%. As the chart shows, yearly core CPI fell from 2.1% to 2.0% which missed estimates for 2.1%. 

As you can see, it wouldn’t have missed estimates if it would have been one basis point higher. I actually think this was a very strong core CPI reading because the comparison was tough. From February to March 2018, core CPI increased from 1.85% to 2.12%. That means the 2 year stack increased from 3.93% to 4.16%.

The decline in yearly core CPI has occurred according to my prediction, but it hasn’t been as severe as I expected. I thought it would fall below 2%. The Fed’s target is for 2% core inflation which means the Fed has no reason to hike or cut rates. Usually, core PCE is below core CPI. Meaning the Fed has plenty of room to stand pat. It doesn’t need to hike rates to combat inflation.

2% Core CPI - Specifics Of CPI Report

Food inflation has been accelerating higher in the past few months. Yearly food prices were up 2.1% in March which was the biggest increase since March 2015 when it increased 2.3%. The peak of this expansion is 4.7% which occurred a few months in late 2011. 

Headline inflation eked closer to core inflation because of the sequential improvements to energy and food price growth. Since shelter inflation is the biggest category of the CPI report, its 3.4% reading really drove inflation higher. This was the same as last month. Somehow, it’s only 0.2% away from its cycle peak even though home price growth has weakened.

Gas price inflation is getting ready to ramp higher as price growth increased from -9.1% to -0.7%. With the latest 57 day streak in gas prices moving higher, price growth will definitely be positive in April. That means headline inflation should rise above core inflation and get above 2%. 

Finally, medical care services inflation was 2.3% and medical care commodities inflation was -0.6%.

2% Core CPI - Conclusion

The stock market is getting very close to its record high. If gas prices keep rising, headline inflation will spike. That could concern the Fed. The fact that oil prices are up suggests traders have a positive view of the global economy. 

Just as the IMF came out in agreement with Ned Davis Research’s prediction for a global recession, the tides of the economy are starting to turn. Economic changes are slow, but the IMF is slower. 

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