Wednesday's Close

E-mini S&P 500 Futures (June): Settled at 4058.75, down 87.50

E-mini Nasdaq-100 Futures (June): Settled at 12,998.50, down 347.50 

Yesterday’s CPI was hot, but it was only 1 number. The real inflation that everyone’s been yelling about has finally impacted a closely-watched economic indicator: CPI. Guess what? The Federal Reserve expected it. With the committee right again and again, why should we doubt their belief that such inflation will be transitory? April’s base data was dismal, as it represented the onset of Covid-19 lockdowns. No, that wouldn’t explain the surging MoM results relative to March, but certain components certainly do. 

Look no further than a 10% 1-month increase in the price of used cars. Let’s get out of the inflation forest, to see the inflation trees, if you will. People want to travel! Extra money in people’s pockets over the last 12 months has created added spending, reinvigorating an inflationary environment; cars were popular. 

Rental car companies also need to buy used cars to replenish their fleet. Spring break just passed, and supply was tight. These companies are preparing for summer demand. Will used car prices be up 10% in May from April? This would be extremely unlikely. 

Furthermore, what responded to the data yesterday? The U.S. Dollar and the tradable Index is 1% from Tuesday’s new swing low. As Larry David would say, everyone has gotten pretty, pretty, pretty, bearish on the U.S. Dollar. Would it be a surprise to see it gain some value in the near term? Absolutely not. With the whole second half of May to go, this would suppress the commodity rally and keep a lid on the rise of inflation.

In conclusion, we’ll say it again: this was 1 number. March’s Nonfarm Payroll report was 1 number, and look how April’s jobs data panned out. The Fed announced symmetrical inflation targeting last year and has told us they’ll be behind the curve. We expect them to remain patient with their policy. Why? Because, they’ve telegraphed this time and time again.

For us, we’ve been extremely cautious on equities. We’ve traded the market short and we’ve hedged wealth portfolios. Considering all of this, along with mounting pessimism after a little panic yesterday, we must trust the aforementioned narrative and our Technical analysis. Let’s lean on the tremendous levels of support into which the S&P and Nasdaq each tested overnight.

The PPI inflation read came due at 7:30 a.m. CT, along with weekly Jobless Claims data. Next, we look to a 30-year Bond auction at noon CT. Traders must keep a pulse on Treasuries, and rising yields could derail a bounce in equities. St. Louis Fed President James Bullard, a 2022 voter, is scheduled to speak at 3:00 p.m. CT.

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