One of the main reasons that astute investors watch the Consumer Price Index report is to anticipate what the Federal Reserve might do. After the Nasdaq (QQQ), S&P 500 (SPY), and Dow Jones traded near their all-time highs, markets may pay attention to the upcoming report. The iShares Russell (IWM) is a better indicator of the market's health. It hovers close to a 52-week high but is still off its peak in 2021.
The Bureau of Labor Statistics will release the May 2024 CPI report on the morning of June 12, 2024. This is the same day that the Federal Reserve issues its FOMC statement. Last month, the FOMC decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent.
Will Fed Chair Jerome Powell finally announce a 25 bps cut?
The European Central Bank announced a 25 bps rate cut on Thursday, June 6. The day before, the Bank of Canada took the first-place title away from the Feds. It is the first G7 nation to cut rates by 25 bps after raising them for four years. Canadian consumers are still experiencing inflation of 2.7%. However, after stripping out shelter, inflation does not exceed 1.2%. Said another way, that figure ignores Canada's high home prices.
Canada needed to cut rates because its GDP expanded by only 0.4% in the first quarter.
April 2024 CPI
In April, CPI increased by 0.3% and by 3.4% over the last 12 months. Just as shelter inflation is high in Canada, it increased by 0.4% in the month and by 5.5% in the year. The Fed may follow the Bank of Canada's lead and decide to overlook shelter inflation in its rate policy. Unfortunately, the Fed cannot ignore the government's net debt to GDP, as I mentioned in my previous coverage. According to Brown Advisory, the US government's net debt to GDP is 95%. Conversely, total debt is comparable to that of Germany and Italy but below that of Canada, France, the U.K., and Japan.
The Congressional Budget Office reported the federal budget deficit fell by $68 billion year-on-year in the first seven months of fiscal year 2024. However, the report expects the deficit for the full year will end up being larger. The CBO expects additional costs from outstanding student loans and disaster loans will contribute to the figure.
SoFi (SOFI) is unable to break out partly due to the student loan forgiveness. Still, it diluted shareholders with a $750 million offering in March is the main headwind. In April, it issued soft second-quarter guidance.
These are fiscal stimulatory policies that drive inflationary pressures higher. A 25 bps cut by the Fed in the June meeting might cause future CPI figures to rise again. An increase in income taxes to cover the higher spending would counter such inflationary pressures.
Expected May CPI Increases
Apparel prices rose by 1.2% in April and are likely to increase again in the May 2024 report. Investors holding apparel stocks need not worry, since the higher prices did not hurt quarterly results. Abercrombie & Fitch (ANF) posted strong top-line and bottom-line results and raised its outlook.
The Gap's (GPS) multi-year turnaround paid off. The brand revival sent the stock up by 21% after the firm posted sales growth in its Athleta brand. Online sales grew by 5% and accounted for 38% of total sales. Its four brands enjoy meaningful volume sales. Gap's margins will expand as it leverages its operating platform to achieve scale and efficiency.
Expected May CPI Decreases
In April, gasoline and energy commodity prices rose. Last month, WTI crude oil prices fell sharply. The decline suggests that energy prices fell, which should weaken the May CPI report.
Judging from April's monthly CPI data shown below, markets should expect prices of new and used vehicle prices to continue falling. Consumers are unwilling to buy vehicles at pandemic-era prices.
Item April 2024 Used cars and trucks -1.4 New vehicles -0.4
Dealerships might have removed 'market adjustment fees' but are still asking for too much. Expect a sharp growth in automobile inventory at dealerships pressuring prices.
Investors should watch out for the downside ahead for used vehicle firms. CarMax (KMX), for example, led the most-short S&P 500 stocks as a percentage of float in April.
Automotive parts suppliers are starting to look attractive as their share price drops. Magna International (MGA) and BorgWarner (BWA) lost money for investors in 2024. Advance Auto Parts (AAP) and Autoliv (ALV) are up by 5.78% and 8.67%, respectively.
Autoliv outperformed the global light vehicle production in the quarter. It benefited from strong sales in Asia, Japan, and especially India. Although the EV market is weakening, Autoliv expects to benefit from a record number of customer product launches this year.
Flat Food inflation
In April, food inflation was flat. In the consumer staples sector, the stock performance is mixed. Tyson Foods (TSN) and Mondelez (MDLZ) traded lower in the last month despite earning a bullish quant rating. Furthermore, both firms rank highly in their sector.
Hormel (HRL) has mixed grades, compared to that of Conagra (CAG). After Kellanova (K) fell by more than 10%, its valuation grade of "C" is unattractive.
The sector needs food inflation to fall. That would give their share price a lift.
Your Takeaway
Patient investors who missed the stock market's rally approaching two years old might decide to buy stocks today at higher prices. A weaker inflation report increases the odds of a rate hike as early as next week. More likely, markets will expect interest rates to fall by 25 bps when the Fed meets in September.
That would give the economy the summer to let monetary policy work through the system.
