What Happened: 

Mixed inflationary data released as Consumer Price Index (CPI) comes in hotter than expected while Producer Price Index (PPI) is reported lower than expected.

What Does it Mean?

Inflationary data is a tricky thing as it is backwards looking and includes variables that often can move rapidly. While the CPI measures a basket of goods and services including areas such as energy, food and shelter (rents), the PPI is more on the wholesale side of what manufacturers are paying for input costs.

The standout number on the CPI looks to be shelter, which added 0.5% slightly above last month’s report of 0.4% as well as Energy which rebounded 0.4% from the previous month’s decline of 2.3%. With interest rates backing off and mortgage demand jumping, albeit slightly, it makes sense to us to see shelter rebound.

Furthermore, with the base in oil and gas from its previous 2023 fall, we believe this data also makes sense.

Why Do we Care?

While the headline CPI will always be ‘above the fold,’ the PPI or input prices is, in our opinion, a more reliable indicator of inflationary pressure and consumer demand. This month’s decline continues to enforce our view that inflation and the Fed’s interest rate fight is over. While we may see fits and starts along the way, the hard part seems to be over and any subtle uptick from here, in our view, is just noise.

What Happened:

Jobless claims fall to lowest level in 12 weeks.

What Does it Mean?

The data would suggest that employment remains strong despite overwhelming evidence on the contrary. While this indicator is also backward looking, the strength has us scratching our head quite a bit.

Just this week we’ve heard from CitigroupBlackrockUnitySoftwareTwitchStelantisNikeAmazon and Google regarding job cuts. While it may take a bit for these folks to find themselves in the unemployment office, the continued announcement regarding layoffs tells us it’s coming and coming fast.

Why Do we Care?

Our fundamental bullish thesis is predicated on lower interest rates. In fact our recent rebalance of all accounts has more to do with us realigning portfolios to take advantage of this since, in my opinion, I see a great contrast between those areas that will benefit from lower rates and those areas that will not. Good luck to those who don’t know the difference.

With layoff news coming around every corner, we feel consumer demand will be falling soon as well, giving further evidence to lower inflation and thus interest rates. The economic storm clouds are certainly brewing and we feel the Fed’s stance regarding their dot plot and anticipated rate drops further suggests we’re on the right track.

What Happened: 

US and allies have attacked Iran backed Houthi targets in Yemen.

What Does it Mean?

The Red Sea is a very important thoroughfare for global shipping routes. In mid- November Israel reported that Houthis seized a British owned cargo ship in the Red Sea followed by numerous missile attacks all throughout December. The aggression has led to many shipping companies re-routing around the Southern tip of Africa resulting in increased shipping costs and new supply chain issues. Slowly creating ripple effects among the global economy US and allies have struck back with force.

In our opinion it is too early to tell what this means for Global markets. Should this escalate further, we could see additional pricing pressure on goods being transported from abroad however unlike previous inflationary pressure, a geopolitical conflict would be something outside the Federal Open Market Committee’s (FOMC) jurisdiction, in our view.

The Houthi rebels are said to be supported by Iran and the conflict seems to be having an impact on oil prices. Should this escalate further we could see oil and gas prices jumping which may further muddy the inflationary waters.

Again, it’s too early to tell how this plays out but something we’re watching daily. It’s been a few months since markets have been roiled by geopolitical conflict, so the timing seems about right to throw some additional uncertainty into the air and see what sticks.

Knee jerk reactions or emotional moves don’t fall within our investment strategy so we don’t anticipate this impacting our strategy going forward.

Until next time

~ Quint



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