Interest Rate Cuts

Inflation and Interest Rates….

An eventful week for those of us that think Consumer Prices (CPI), Producer Prices (PPI) and the Fed policy statements are exciting. Most of you are turning focus to summer activities so I’ll stick to the important points this week. Also, the calendar looks benign until the next earnings season which doesn’t start up again until July so the markets will be left to trade on their own devices for a few weeks.

The Inflation Numbers

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, after rising 0.3% in April. Compared to last year, this index increased 3.3% so there is still some ways to go before the Fed’s 2% target is achieved but it is going in the right direction.

Historical CPI

For perspective, I added the chart above that shows the year-over-year change in the CPI. This chart illustrates the sharp rise in CPI which has a magnitude higher than any point in history. It also shows how the Fed and government spending causes inflation which is very destructive. Anyway, the top of inflation increases are behind us and we should see some mean reversion in the coming year.

The Producer Price Index (PPI) surprised to the downside with a 0.2% drop vs the estimate of up 0.1% and +2.2% compared to 2023. The graphic below shows we are near where we were last October and you can consider the PPI as prices in the pipeline so it is good to see a negative number this month.

PPI

Interest Rates – 10Yr Yield

We are seeing a nice drop in 10Yr yields this past week and in my chart below I have a high for the year in April (4.73%) and I expect we will continue lower for the next several months. For now, I have a target of 3.24% which is based purely on technicals. If my projections are accurate, this likely means inflation keeps improving and bond investors are still getting a positive inflation adjusted yield. The other perspective is that yields are falling because the economy is about to contract but there is no hard evidence of that right now.

$TNX 10Yr Interest Rates

The S&P 500

Stocks loved the CPI number on Wednesday morning and the S&P continues to push up and to the right on this chart. With volatility remaining stubbornly low, we may see this index continue to edge higher for the next several weeks.

$SPY S&P 500
Paul McCarthy, President of Kisco Capital, LLC

Thank you for being a subscriber!

Paul J McCarthy III CFA

President, Kisco Capital

Paul McCarthy

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