Stocks Surge on Calm Core CPI - But Why?
A: This is the disconnect between the stock markets and the real world that makes equity trading so mysterious. When I saw the inflation numbers come out this morning at 8:30, I saw a surge in consumer inflation. But when you strip out the volatile food and energy components, the Core CPI rose only 0.1% as reported on CNBC. Stock futures surged as this was below expectations of a rise of 0.2%; giving a bullish knee-jerk reaction to the equity markets and a fall in yields. But when you look a bit deeper, it's not all rosy. Here's why.
First, the news. According to Yahoo Finance's article titled, "Consumer Prices Shoot Higher in May":
Consumer Prices Shoot Up at Fastest Pace in 20 Months in May, Fueled by Surge in Gas Prices. So far this year, consumer prices have been rising at an annual rate of 5.5 percent, double the 2.5 percent increase for all of 2006. The acceleration has occurred because of the surge in energy costs and increases in food costs that have been caused in part by higher demand for ethanol fuel, which is produced with corn.The same article then goes into the Core CPI number, which is a closely monitored dataset of our Fed board of governors, you know, those guys that set monetary policy. The article stated:
Outside of the volatile energy and food categories, inflation rose by a much more modest 0.1 percent. That was slightly lower than the 0.2 percent which had been expected and provided reassurance that this year's surge in energy costs has not spread to other parts of the economy.Sounds great right! Well just hold on a minute. There is one VERY important REAL statistic you should consider when looking deeper into this Core CPI number that was the catalyst for this morning's surge in stock futures and will probably lead to a very bullish day on wall street:
Furthermore, add in this interpretation of one aspect of the Core CPI reading that housing costs remained at the same level and you see that rental price decreases outside Manhattan helped keep inflation lower than what it might normally be.
So, rental prices are considered a good portion of the CPI data used to monitor inflation. This is important because with nationwide housing inventory at very high levels contributing to the weak housing market outside of New York City, there is a growing trend of converting condo inventory into rentals...As rental inventory increases across the rest of the nation prices should ease, helping to further moderate the CPI data that eventually comes out!Now, while the fed looks more closely at Core CPI, stripping out food & energy volatility, the real world IS affected by these inflationary items. Honestly, who doesn't buy food or fill up their car with gas? So, don't look too much into this so called tame Core CPI reading today. But by all means enjoy and ride the stock market reaction to it! Why not right?
As far as I'm concerned, global commodity prices are hitting peak highs, oil prices are nearing $70/barrel, consumer inflation did soar, core-cpi barely missed being rounded up to meet expectations and not beat expectations as it did, global economies are very strong, US economy seems stronger than expected, corporate profits are beating estimates, and rates should still be rising globally!
Not much has changed on the inflation front when you look into it with clear eyes!
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Comments (6)
Noah,
You hit the nail on the head with your analysis. The government numbers are such BS anyway. Core CPI, what a joke. Let's just ex out any category that actually shows inflation -- food and energy -- but which actually affects consumer spendign habits.
Peter
Posted by Peter | June 15, 2007 10:57 AM
I wonder if the equity markets should be shorted into this strength?
I hate shorting! It's the only way to ensure that the markets will go up on any news and never go down! If I short the market now everyone should load up because the dow will hit 15,000 in a matter of months.
Posted by Noah | June 15, 2007 11:14 AM
They are probably still rising because, perversely, there is still much liquidity washing around looking for a home. If stocks are sold what are people gonna do with their money when they are used to earning 10% to 20% on it each year? The fear of a crash is still outweighed by the fear of missing that last burst upwards? anyone not hedged is thinking they will spot warning signs in time..
As for CPI, how about asset price inflation? core CPI is such bullshit when my dollar buys less house each year, and less of a fraction of a percent of the leading tech company, and less of a the median executive jet or boat. (I think my nett worth is down to a wingtip by now).
But what do I know, i've worked for every dollar i have and it earns 3% (much less in prior years) in the bank. I must just be stupid.
Posted by justin | June 15, 2007 11:36 AM
too many risks out there for me to get into stocks at these levels.
I'm fine getting 5.1% in an online savings account with no risk, so call me a wuss. All you need is one unforseen fundamental to pop up and stocks can easily get hit.
One thing I learned as a trader, stocks FALL WAY FASTER THAN THEY RISE AND ITS THE CONSUMER THAT GETS OUT LAST, when its too late.
Average Joe traders tend to let profits ride and cut losses short. Its the same philosophy that lets casinos ultimately take all your money. If you sell at a loss yet continue holding your profits, what will you do when the next unexpected event happens to change the investing world.
Posted by Noah | June 15, 2007 11:49 AM
Noah, first of all, my condolences on the loss of your dad. As to your observations, as always, spot on. After all, core cpi is nothing more than inflation less inflation, those things everyone buy everyday don't count but if you are thinking about buying some useless item, be appreciative the price hasn't increased lately. As to core, forget about energy, take a look at what is happening in food. Hellmans mayonaise has just introduced a new quart, but it's only 30 oz. instead of the traditional 32 oz. associated with a quart since the beginning of measurements, same price, therefore no inflation there either. Hello. Watch out for the stock market in the fall, the overlay of the chart index from '87 and today is uncanny.
Posted by Charleston real estate blog | June 15, 2007 9:03 PM
Justin - Why would you put your money in fully taxable 5.1% when you can get triple tax free 3.65% at vanguard? Its a 6% taxable equivalent.
Posted by Mike | June 16, 2007 2:45 PM