Rising Consumer Prices, Falling Asset Prices

Some of you might be perplexed to see a preponderance of red on your screen this morning.  We’ve gotten quite used to green numbers populating our market monitors, so the change in the predominant coloration – whether temporary or not – might come as a bit of a surprise to some.  There are valid reasons for today’s mood – taxation, inflation, and some key thresholds being crossed. 

Most US traders awoke to modestly lower pre-market futures. South Korea’s KOSPI benchmark, which is up over 80% year-to-date thanks to powerful rallies in the semiconductor stocks that dominate that index, pulled back more than 2% after a high-ranking policymaker floated the idea of a public dividend paid by chipmakers.  The news was walked back somewhat, with the comments clarified to indicate that excess tax revenues from existing measures would be tapped in lieu of new levies, but this was one of the first negative news items to hit this sector in weeks.  Thus, we had a modest, tech-led dip in early futures trading.

We then received unpleasant economic news at 8:30 AM ET.  The month-over-month change in the Consumer Price Index (CPI) was 0.6%, in line with economists’ consensus, but thanks to rounding, the year-over-year change was 3.8%, just above the expected 3.7%.  Furthermore, the monthly change in the Core reading was 0.4% and the annual change was 2.8%.  Both were also 0.1% above consensus.  Less anticipated, but perhaps more meaningfully, Real Average Hourly Earnings declined, with year-over-year changes of -0.2% and -0.3% on a Weekly and Hourly basis, respectively.  The takeaway is that things are getting less affordable as prices rise faster than wages.

As has become relatively typical of late, stock traders initially did their best to ignore the inconvenient news.  Rather than sinking further, pre-market futures came off their lows in the aftermath of the reports.  Neither move was substantial – ES futures were down less than ½% before the data and recouped about half of those losses shortly afterwards, but it fit the usual pattern of traders expecting a bounce once the official open arrived.  This time, however, it didn’t.

While the past few weeks have been characterized by equity traders’ uncanny ability to chase semiconductor and AI-related shares higher even as oil prices and bond yields edged higher, today we see profit-taking in those favored equity sectors amidst that backdrop.  Oil futures are up another 3% as the stalemate in the Persian Gulf remains in effect, and the combination of higher oil and disappointing inflation is causing yields to tick higher by about 3-4 basis points across the curve.

Some of today’s stock market malaise might be attributable less to the direction of yields but instead to the absolute levels of certain Treasury benchmarks.  Shortly after the CPI report we saw the 30-year yield flirting with the 5% level, and that level was pierced definitively after 9 AM ET.  Meanwhile, 2-year yields approached 4% by 9:30 AM.  They have not yet crossed that threshold so far this morning, but the combination of two round-numbered yields coming into play almost simultaneously seems to be something that stocks could not simply shrug off.

This leads to the precarious nature of a vertical advance.  When a sectoral index like SOX (Philadelphia Semiconductor Index) experiences a bit of modest profit-taking after a 70% rise in just six weeks, that “modest dip” amounts to a drop of more than 5%.  As substantial as that may sound, it has done nothing yet to dent SOX’s uptrend, though.  It is still about 2% above its 10-day moving average, about 16% above its 30-day, and a stunning 27% above its 50-day.  On the plus side, even the very steep short-term uptrend remains in place.  On the minus side, of course, a reversion to even a slightly longer-term trend would result in a major double-digit drop. 

Today’s profit-taking doesn’t seem to have truly shaken exuberant investors.  That will take more than a one-day pause in the uptrend, even as higher yields seem to work against it.