January’s CPI is released at 8:30. Consensus is expected inflation to decline from a 3.4% annual rate to 2.9%. The core rate of inflation is projected to fall from 3.9% to 3.7%. Generally speaking, inflation has remained stubbornly high even after the most aggressive Fed in history. The trend is down however one would have expected pricing pressures to have eased even more based upon Fed policy.
Speaking of which, according to a poll of the National Association for Business Economics (NABE), 21% of the respondents consider Fed policy to be “too restrictive,” the most since mid-2010.
This is yet another disconnect between the market and central bank. As written many times, the market is suggesting five or six interest rate reductions by year end. The Federal Reserve is projecting only two or three.
Changing topics, it is widely accepted the markets are very concentrated and top heavy. Bloomberg writes the FANG+ cohorts are up 28.4% since 10/26/23 and 74.5% since 3/13/23. The top ten holdings in the S & P 500 now comprise over 32% of the capitalization of this benchmark index, the most since at least going back to 1980.
Writing it differently, both MSFT and AAPL are worth more than the Russell 2000. NVDA is worth more than the entire capitalization of the Chinese market.
The disconnect between the NASDAQ 100 and the Russel 2000 is historical.
Many have stated this is the most overcrowded trade in history, a trade that gets more crowded each day.
This disconnect will change but the question is as to when. As stated, many times markets can remain irrational one day longer than you can remain solvent or sane.
Equity markets were bifurcated yesterday as the NASDAQ declined about 0.4% while the Dow advanced 0.25%. Treasuries were generally quiet.
Last night the foreign markets were down. London was down 0.28%, Paris down 0.42% and Frankfurt down 0.57%. China was up 1.28%, Japan up 2.89% and Hang Seng down 0.83%.
Dow and NASDAQ futures are down 0.1% and 0.75%, respectively ahead of the CPI release. The headline rate is expected to be below 3% for the first time since March 2021, it may not be enough to justify a more rapid shift in monetary easing especially as the core rate remains elevated around 3.7%. The 10-year is up 3/32 to yield 4.16%.
