But first, we got some inflation data this week. In short, the June CPI came in at 3% which was lower than expected and the Producer Price Index (PPI) on Friday came in at 2.6% which was worse than expected.
The dynamic between the two inflation measures is interesting. The PPI is “inflation in the pipeline” and the higher reading this week warns that there are inflationary pressures in this economy.
In the chart below you can see the services component of the PPI is turning higher due to rising prices in automobiles, automobile parts retailing, fuels and lubricants retailing, computer hardware, software among others. This may be a bump on the road to leveling prices but if it persists through the summer than this may weigh on the Fed’s policy stance regarding rate cuts.
CPI and Interest Rates
A major component of the CPI is rental rates on residential real estate. As you know, mortgage rates to buy a home have been hovering near 7% which has kept renters from buying. There is also a wide spread between mortgage rates and the 10Yr Treasury yield which doesn’t help the situation. However, if the 10Yr yield continues to fall, this may provide relief to renters and the housing market which in turn would lead to a lower CPI reading.
In the chart below, I have the 10Yr Treasury yield that is in a corrective pattern within an uptrend in yields. This means, yields should fall into 2025 and then move higher afterwards. A fibonacci retracement of 38.2% would bring 10Yrs to 3.24% which also lines up with a previous yellow ‘4th’ wave which should act as support (think of it as a barrier). For now, the Elliott-Wave pattern below is working nicely and it is saying 10Yr yields should fall in the coming weeks/months which would align with expectations around Fed policy and falling inflation.
Checking In on Stocks
The chart of the S&P 500 continues to trade up and to the right and we are now in the same overbought territory that led to a correction in April. On Thursday we did see a break of the market leading technology stocks but prices snapped back on Friday to signal there is more upside into next week. Earnings reports will be heavy the next three weeks so the market will take a break from Fed policy speak while corporate America tells us what to expect into the end of 2024.
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Paul J McCarthy III CFA
President, Kisco Capital
