Stock Bulls Celebrate Inflation Slowdown: CPI, Banking Sector, Interest Rates

Inflation Update: CPI Moderates, Core Rate Rises, and Shelter Prices Impact

The Consumer Price Index (CPI) released yesterday showed the year-over-year rate slowed to 5%, slightly less than expected and down a full percentage point from +6% in February.

Big drops in energy and food prices compared to last year led the decline. However, the “core” rate, which strips out energy and food prices, climbed by +0.2% in March, pushing the annual rate to +5.6% versus +5.5% previously. The big inflationary culprit here remains “shelter prices,” which account for about a third of the CPI’s weighting.

Economists as well as Fed members have been saying for months now that decelerating home prices will eventually make their way to the gauge and likely make a big dent in the inflation numbers but those effects are still not showing up. In fact, both energy and rents look like they are again pushing higher. Bulls are talking about other inflation gauges that show bigger decline than the official CPI numbers and remain confident that an even more dramatic slowdown lies ahead. Bulls have also latched on to comments by Fed officials that believe tightening credit conditions will do some of the Fed’s heavy lifting by slowing down the US economy.

Bears however warn that credit crunches are historically unpredictable and could lead to fallout in unexpected areas that may do even more harm to the economy. Most investors are now turning their attentions to Q1 earnings which will “unofficially” kick off on Friday with results from big Wall Street banks. Citigroup, JPMorgan Chase, and Wells Fargo report on Friday, followed by Bank of America and Goldman Sachs next Tuesday (4/18). Keep in mind that bank earnings could be loaded with “bearish” surprises as the sector faces several profit-denting headwinds.

Regional Banks Struggle with Deposit Outflows, Earnings Season on Tap

Small and regional banks are reeling from an outflow of deposits following the collapse of SVB and others in March, which is expected to result in less lending and hence lower profits, but the big banks may have been a beneficiary as money moved to a new home. All banks likely face tighter regulation and higher Federal Deposit Insurance premiums ahead, which again would ding profits.

Bottom line, the upcoming US corporate earnings season is going to be important. The market will also be paying very close attention to the Big Tech companies. I know a lot of smart traders who say if the overall stock market is going to get hit in any big way, we will have to see the large tech stocks roll-over and take a sizable downturn.

Balancing Act: Fed’s Delicate Task Amid Inflation, Growth, and Rate Hike Expectations

Also keep in mind, a lot hinges on how the Fed plays their hand moving forward, they are trying to thread the needle between continuing to battle high inflation and strong wage gains against tightening too much and bringing the US economy to a grinding halt.

Wall Street insiders are still giving it about 7% odds that the Fed hikes by another +25 basis-points at the upcoming early-May meeting, about 70% odds that the Fed pauses at the June meeting, and about 50% odds that the Fed is going to cut rates by -25 basis-points at its July meeting.