Weekly Wrap – It All Boils Down To What Else: Uncomfortably Warm Inflation Data

Inflation Fears Amplify Amid Producer Price Index (PPI) Report

Following the Bureau of Labor Statistics (BLS) update on wholesale prices, hopes for relief were dashed on Friday, disappointing market participants.

The Producer Price Index (PPI) surged unexpectedly, tripling consensus expectations by rising 0.3% in January compared to December. This increase matched the highest estimate among economists, who had collectively predicted only a 0.1% rise. The robust increase in wholesale prices provided no respite for market participants already spooked by Tuesday’s Consumer Price Index (CPI) release.

The unexpected surge in the PPI report raises concerns about potential inflationary pressures feeding into the broader economy. Market participants fear that the elevated wholesale prices could have adverse implications for the Personal Consumption Expenditures (PCE) price index, which the Federal Reserve closely watches for its inflationary insights.

The recent data has revealed some concerning nuances, particularly in services prices, where inflation lurks. Despite hopes among investors for evidence to dismiss the Consumer Price Index (CPI) as a false alarm, the latest Producer Price Index (PPI) release on Friday failed to provide such reassurance.

The PPI release presented a worrisome picture. The 12-month gain on the headline index stood at 0.9%, surpassing the expected 0.6%. Both core gauges also rose more than expected year-over-year, indicating a broader trend of increasing prices across various sectors of the economy.

In summary, last week’s raft of macroeconomic data boiled down to what else: uncomfortably warm inflation.

Resurging Stagflation Fears: Navigating Economic Uncertainty in H2

The stock fluctuations triggered by January’s inflation and consumer data last week resembled a rollercoaster ride for investors. However, looking ahead to the year’s second half, perhaps the most concerning aspect is the resurgence of US stagflation concerns amid renewed price pressures. Indeed, one of the most challenging scenarios investors might need to navigate in H2 is characterized by stagnant economic growth coupled with high inflation rates, posing significant economic risks. To put it bluntly, it’s the worst of both worlds — not just inflation on the one side or stagnation on the other, but a melding of both.

(The possibility of stagflation arises when price pressures intensify, increasing costs for businesses and consumers while economic growth remains sluggish or stagnant.)

Stocks ended flat for the week, but falling off their weekly peaks resurrected the forever bubble talk. I, for one, am exhausted from reading Bubble Vision. But here we go again…

Dot-Com Era versus Present Realities

Whether witnessing a dot-com redux is a topic of considerable debate and speculation; however, it’s essential to acknowledge that definitive answers are elusive, and the current market dynamics defy simple categorization. Contrary to what may be implied by various analyses and commentary, the situation is nuanced and complex.

While there are parallels between the current market environment and the dot-com era, particularly in exuberant valuations and speculative fervour, it’s essential to recognize the differences. Many companies prioritized growth over profitability during the Dot Com bubble, leading to significant market speculation and eventual correction. In contrast, the Magnificent 7 companies are hugely profitable and hold substantial market dominance in their respective segments.

Hence, it is essential to approach these comparisons cautiously and recognize that each market cycle has unique dynamics and drivers. Drawing direct parallels to past events may oversimplify the current situation and lead to misinterpretations of market trends.

I don’t have the answer, and I don’t think anyone else does either, as we are still very much in the infancy phase of trying to puzzle out the quantum and build pace of the installed base of AI accelerator hardware and if the installed base of computing capacity is growing. Ask that question to any hardware or Ph.D. AI designer, and they will tell you they are very much in the early days.