Inflation Relief

Wages and Prices

We have had another round of good earnings reports for Q1 and this week the inflation data finally showed some relieved some anxiety around the forward path of interest rates.

The lack of progress in Q1 on inflation caused the markets to backpedal on rate cuts this year. However, the CPI (+3.4%) this week showed signs of decelerating and the PPI (+2.2%) came in-line but prior months were revised downward evidencing inflation being in-check. The Fed would like to see a bit more progress but with this new data they are now in a place where they can watch and wait. This likely means any rate changes will be later this year or maybe 2025.

Economists debate the next move but one rationale for cutting rates is to provide relief to the residential real estate market where elevated interest rates have caused consumers to remain in the rental market which drives up the CPI. Not to mention the amount of debt in the system has grown tremendously around the COVID era where high interest costs can drag on economic growth.

Commodities and Credit

For this year, we have to be careful about how prices are impacted by commodities. For example, We are seeing precious metals rally along with a strong bid for oil. But what you may have missed is that copper prices are surging as industrial demand is rising to satisfy the growth in electric cars, transmission lines and data centers.

Default rates.

There will also be a large refinance wave for public companies in 2024/2025 so that is on the horizon and if they are smart they will reserve cash and/or raise equity capital (think convertible bonds). The companies most impacted will be high yield bonds and/or borrowers that have floating rate debt.

The Stock Market

For now, the stock market is experiencing the soft landing scenario as Fed policy is on hold, the labor market is showing signs of cooling and sectors such as energy, utilities and semiconductors are gaining traction. So there are sectors anchoring this advance.

S&P 500 by @kiscocap

In the chart above, we are seeing new all-time highs and you can see that the two moving averages (green & yellow lines) are acting as support as this uptrend continues. The April decline was contained by the 21-day moving average and that shows the uptrend should remain intact as long as the S&P is trading above this moving average. There is not much on the calendar until the Fed meeting on June 12th so the market will be left to trade on its own devices.

Paul McCarthy of Kisco Capital, LLC

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Paul J McCarthy III CFA

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.