3 Reasons Why the Latest CPI Report Is a Win for the Bulls


  • There are reasons to believe the bullish reaction to the CPI report are on target.
  • Disinflation increases the likelihood that the Fed will cut rates — and removes rate hikes from the conversation.
  • Riskier asset classes are heating up.
  • Market growth is spreading out from just the tech sector.
CPI report analysis - 3 Reasons Why the Latest CPI Report Is a Win for the Bulls

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The monthly reading of the Consumer Price index (CPI) is one of the most closely watched economic indicators. CPI is a lagging indicator, meaning it tells you where consumer prices already are. Nevertheless, there’s no shortage of CPI report analysis and plenty of commentary on what this reading means for the stock market and the U.S. economy.  

The April CPI reading, which came on May 15, 2024, showed inflation that was in-line with analysts’ expectations at a seasonally adjusted 0.3% and 3.4% over the last 12 months, not seasonally adjusted. The “core CPI” which removes food and energy prices also rose 0.3% and 3.6% in the last 12 months.  

To do a proper CPI report analysis, you’ll want to understand the distinction between disinflation and deflation. When prices go down, that’s deflation. However, when the pace at which prices go up slows, that’s disinflation. And that’s what the CPI is showing. Prices for many items are still rising, just not as fast as they were before. 

That said, the CPI reading had come in above expectations in the prior three months, so the better-than-expected numbers may be a bullish sign. Here are three reasons the bulls may have the upper hand heading into summer. 

Increases the Likelihood of a Rate Cut 

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A common theme in the CPI report analysis is that signs of disinflation increase the likelihood that the Federal Reserve will follow through on lowering interest rates. Currently, investors believe that the Fed will cut in September.  

This point of view is supported by Morgan Stanley (NYSE:MS). Economists for the investment and banking giant believe that investors may be underestimating the number of rate cuts that will happen in 2024. The firm is throwing July into the mix.  

However, a better way to think about the CPI report is that it reduces the range of outcomes for interest rates. One reason the market had been pulling back was that the possibility of a rate hike, no matter how slim, entered the conversation.  

Investors hate uncertainty. If investors feel certain that the next directional move for interest rates is down, that should be bullish for markets.  

Risk-On Sentiment is Heating Up 

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The day after the CPI report, the Dow Jones Industrial Average (DJIA) crossed over the 40,000 level for the first time in history. Although the DJIA fell below that average as the week closed, the sentiment is that investors are now rethinking how to be positioned in case of a surprise July rate cut.  

And equities weren’t the only asset class heating up. Gold settled at over $2,400 a troy ounce. Bitcoin (BTC) was also one of the big winners from the April CPI report. In fact, almost immediately upon the release of the CPI print, Bitcoin reversed the downward trend it had been in for much of the 30 days leading up to the report. Ethereum (ETH) also enjoyed a lift.  

The change in sentiment can also be seen in the bond market. After the CPI was released, the yields on the closely watched 2-year and 1o-year Treasury bonds dipped below their respective 200-day moving averages. Bond prices and yields move in opposite directions. So the fact that bond yields are lower may be making bonds less attractive for growth-hungry investors.  

But where do they look for that growth? That leads to the last point.  

The Rally is Starting to Move Beyond Tech Stocks 

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In 2023, the stock market growth mostly came from tech stocks, and particularly the Magnificent Seven stocks that were fueling the artificial intelligence (AI) boom. But in the initial days after the CPI print, the gains are starting to spread into other sectors.  

For example, utilities have been one of the best-performing sectors in the 30 days ending May 17, 2024. Consumer staples stocks are also beginning to show signs of coming back to life.  

The counterargument is that these are defensive stocks that could signal difficulty for the economy. If so, it helps to remember the market is forward-looking. When the Federal Reserve cuts rates, consumer spending will get a boost. In that case, many stocks in these sectors are undervalued based on a variety of conventional metrics. And they pay dividends, which reward you for holding a stock  

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

Article printed from InvestorPlace Media, https://investorplace.com/2024/05/the-cpi-report-is-rallying-the-bulls-3-reasons-they-may-be-right/.

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