Trending
There has been an awful lot of market-related news to unpack from the past week. I would normally try to weave them into a coherent narrative, but today we’ll be best served by a series of bullet points.
CPI and PPI: Last week's piece discussed the enthusiasm that both stock and bond investors displayed for the better than expected CPI results. They fit perfectly with the market’s preferred narrative about disinflation. While one good report by no means assures us that a new trend is in place, we have to start somewhere, and that was a good place to start. This morning’s PPI report echoed yesterday’s CPI, but perhaps a bit too loudly. Disinflation is one thing; possible deflation is another.
It is crucially important to understand the distinction between disinflation and deflation. Think of the Consumer Price Index, or CPI, as an index analogous to the S&P 500 (SPX). It measures the level of prices in the economy. Inflation refers to how quickly those pricesare rising. Disinflation means that prices are rising more slowly than it had been. It does not mean that prices are falling. That would be deflation, which is the inverse of inflation, meaning that prices are falling.[i] Unfortunately, those terms are routinely conflated. While the CPI itself is a measure of price levels, the CPI report focuses on inflation. It is not uncommon to see media reports that label inflation as CPI, and quite normal to see disinflation confused with deflation. This is why there is a common misperception that inflation figures are simply wrong. People believe that they are being told that prices are going down. In general, they are not.
That said, today’s PPI report showed that at least for one key measure, prices ARE going down. Headline PPI fell by -0.2% on a monthly basis, well below the +0.1% consensus, while the core was flat, also well below its +0.3% consensus rise. Although the PPI should be market friendly, remember that low inflation is good, deflation isn’t. Today’s numbers may indicate a more rapidly deteriorating economy than the FOMC is willing to recognize in the short term. That leads us to…
Curb Your Enthusiasm, FOMC Style: Yesterday, we raised the following question:
We now have to wonder if the markets’ joyful reaction to the CPI report will necessitate a change in tone from Chair Powell. Traders have come to expect a Goldilocks mien from him, if not an outright dovish tone. Even when he tries to be balanced in his approach, traders seize upon the market friendly portion of his narrative. Today he can’t help but notice the euphoric reaction to CPI; will he want to take a more measured, if not dour, tone to avoid throwing gasoline onto the fire?
The FOMC statement set the tone early, when the Summary of Economic Projections (aka SEP, or “dot plot”) showed a median expectation of one cut for the remainder of 2024, down from three in the last SEP and below the two that were expected by futures markets. Expectations for 2025 rose from three cuts to four, but we still end up one cut shorter than before the meeting.
Then Powell took the stage. He wasn’t exactly dour, but he gave few, if any, opportunities for investors to take away a happy message from his commentary. We can see this in the contemporaneous notes that I took yesterday:
- A higher r* is an acknowledgement that we seem to have more embedded inflation, but “modest further progress” [from the current FOMC statement] is better than “lack of further progress” [from the prior statement].
- He admitted that they knew the CPI beforehand
- 20 minutes in, traders are desperately awaiting the usual dovish Powell.
- Sticking to 2% target, which will need lower wage growth
- Consumer still in good shape in his view, though increasing pressure on low-income consumers [my take here: higher rates benefit savers, lower rates benefit borrowers. Savers tend to have higher incomes and money to invest. On a corporate level, investors are favoring companies with high cash flows and lower borrowing costs, as noted here]
- Review about rate cutting to begin later in the year
- Drop the mic, let’s try a rally, though without help from bonds which remained off their highs. [It failed]
- Interestingly, we didn’t get the late ramp that pushed us up each afternoon this week. Perhaps that’s what kept us afloat as bonds retreated during the past few sessions.
Investors wanted Goldilocks. They got Larry David.
Roaring Kitty Sells: Every time I try to get out, GameStop (GME) pulls me back in. There was a late flurry of large trades in the June 21st, 20 strike calls, the strike that “Roaring Kitty” is believed to own 120,000 of. Those trades were almost all on the bid side of the market, and the total volume on the day was over 93,000. As I noted to a reporter:
We won’t know for sure until we see the open interest figures tomorrow morning, but I can’t imagine who else would pound out such huge sales at discounts?
Indeed, we checked the open interest this morning, and it fell from 169,963 to 111,818. It is almost certainly reflecting sales by “Roaring Kitty”. If we believe that he had 120K contracts on that line, it means that the rest of the world had 49.963. But open interest fell by 58,145. Even if every other long position sold out yesterday, someone still had to make up the 8,182 difference. It is far more likely, that “Roaring Kitty” sold the bulk – if not all – of the large bid-side trades we saw late yesterday.
It is important to remember the quirky nature of open interest. When a line is listed there is no open interest. It is created when a buyer opens a long position from someone who opens a short position. Open interest reflects the net long/short positions (for each long there is a short). Thus, when a long options holder sells a contract, they don’t know the buyer’s position. If the buyer is covering a short (potentially the one that created the long), the open interest declines. If the buyer is creating a new long position, the open interest remains unchanged. Thus it is clear that some large long holder either sold or exercised a substantial position, and those large trades indicate selling.
I Wish the World Had Adopted my Mag 7 Suggestion: On January 22nd, in a piece entitled “Magnificent Seven May Need a Roster Change”, we wrote:
I believe that it is time for a change to the roster. It’s time for Broadcom (AVGO) to substitute in for Tesla (TSLA).
Since then, AVGO is up 38% while TSLA is down -11.5% (even after a 4% rally today on Elon Musk declaring that he won the shareholder vote).
Today, AVGO is zooming, thanks to a well-received earnings report and taking a page from Nvidia’s (NVDA) playbook by announcing a 10:1 split. Heck, it worked really well for NVDA. As we write this, AVGO is +12.5% today, helping NVDA to a +2% sympathy bump.
If it wasn’t for those stocks, we’d be seeing a much more notable sell-off than we currently do. As it stands now, we have two decliners for every advancing stock. And while I have never been a fan of the Dow Jones, it was notable to see it sell off yesterday during an otherwise positive session, and for it to lead the declines this morning.
[i] In more mathy terms, inflation and deflation are the first derivative of prices; disinflation is the second derivative.
Related: It’s About Owning the Correct Stocks