What We're Seeing: CPI Sparks Rally – 13 May 2024

The Week in Brief

US indices hit fresh all-time highs last week. The catalyst was the latest consumer price index reading, which came in cooler than expected. The data briefly sparked a rally that put the S&P 500 at new records, with tech stocks leading the surge.

The enthusiasm was tempered by week’s end. Fed commentary during the week leaned hawkish, reminding investors that rate cuts are not imminent. By Friday, the market had given back some of its gains, finishing the week only slightly higher. The Nasdaq outperformed again, continuing its year-to-date leadership.

The Inflation Picture

The CPI print was the focus. While not dramatically below expectations, the softer reading was enough to revive hopes that the disinflation trend remains intact. Markets had grown nervous after a few months of firmer readings, so the relief was palpable.

Bond yields held their ground near elevated levels. The Fed’s message remains consistent: they need to see sustained progress on inflation before cutting. One good print does not make a trend, and policymakers are wary of declaring victory prematurely.

Commodities and Energy

Commodities were broadly firmer. Oil rose on OPEC+ supply cuts, helping the energy sector outperform once more. The cartel’s discipline has been impressive, keeping crude prices elevated despite concerns about demand from China and other major consumers.

Gold was quieter, consolidating after recent gains. The precious metal has benefited from geopolitical uncertainty, but with yields still attractive, the opportunity cost of holding gold remains meaningful.

Our Read

We think the inflation data was genuinely encouraging, but the Fed is right to be cautious. The path from here to the 2% target is unlikely to be smooth. Services inflation, in particular, remains sticky. Housing costs continue to contribute positively to CPI, but the lag effects mean this may take time to flow through.

For equities, the setup remains supportive. Corporate earnings are holding up, the economy is growing, and the Fed is on hold rather than tightening. This is not a bad environment for risk assets.

We continue to favour a balanced approach. Tech exposure makes sense given the fundamental strength, but we are also finding value in sectors that have lagged. The rotation into cyclicals and value names has legs, in our view.

What Could Change Our View

A reversal in the inflation data would be problematic. If the next few CPI prints come in hot, the narrative shifts quickly. We would also grow concerned if earnings guidance deteriorates materially. For now, the trend is intact, but we are staying nimble.

This is informational commentary, not investment advice.