{"id":190166,"date":"2023-05-10T12:15:00","date_gmt":"2023-05-10T16:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=190166"},"modified":"2023-05-10T12:55:36","modified_gmt":"2023-05-10T16:55:36","slug":"markets-inch-cautiously-higher-on-improved-inflation-comps-may-10-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/markets-inch-cautiously-higher-on-improved-inflation-comps-may-10-2023\/","title":{"rendered":"Markets Inch Cautiously Higher on Improved Inflation Comps: May. 10, 2023"},"content":{"rendered":"\n

Markets are advancing this morning in response to the Consumer Price Index (CPI) matching investors\u2019 expectations for slowing inflation, but the optimism is occurring as the White House and Republican leaders in congress appear deadlocked in the debate over raising the debt ceiling, fueling fears that the country may default on its debt as it runs out of funds in early June.<\/p>\n\n\n\n

This morning\u2019s CPI Report for April was elevated and hotter than the previous month\u2019s. Both the overall and core month-over-month (m\/m) price increases came in at 0.4%, exactly as expected by the consensus. The overall figure was much hotter than March\u2019s 0.1% increase while core prices rose at the same 0.4% pace during the period. While short-term measures are still running hot, the headline year-over-year (y\/y) rate of change notched its tenth-consecutive month of decline and its lowest increase since April 2021. Headline CPI came in at 4.9% y\/y, slightly better than the 5% from March and from expectations of an unchanged pace of increase. Core CPI rose 5.5% y\/y, exactly as expected and slightly slower than March\u2019s 5.6% level.<\/p>\n\n\n\n

\"Consumer<\/figure>\n\n\n\n

April price pressures were supported heavily by used automobiles, gasoline, medical care commodities, shelter and food away from home with each category climbing 4.4%, 3.0%, 0.5%, 0.4% and 0.4%, respectively. Apparel also contributed to price pressures at the margin. Energy services, such as electricity and heating, transportation services, new automobiles, food at home and medical care services provided modest relief during the month, with prices dropping 1.7%, 0.2%, 0.2%, 0.2% and 0.1%.<\/p>\n\n\n\n

Markets are taking the glass half-full approach this morning, focusing on the y\/y progress on inflation while dismissing the m\/m acceleration. Yields are down across the curve while most equity indexes are solidly in the green. The 2- and 10-year Treasury yields are down 7 basis points (bps) each to 3.95% and 3.45%. The S&P 500 Index catapulted at the open before finding important resistance at around 4150, cooling from a 1% gain to up only 0.2%. The interest rate sensitive Nasdaq Composite Index is leading this morning\u2019s charge. Despite tapping the brakes since the open, it\u2019s up 1%. WTI crude oil is down 1.6% to $72.52 per barrel as unexpected news today of rising U.S. inventories fueled demand concerns, sparking oil\u2019s first down day in four. The dollar is down slightly this morning as inflation trends and NY Fed President John William\u2019s comments at the Economic Club of New York yesterday bolster Fed tightening expectations. Markets continue to price in a cut in September, despite continued hawkish rhetoric from the central bank. <\/p>\n\n\n\n

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Failing to lift the debt ceiling would result in the U.S. defaulting on its debt, causing a decline in the country\u2019s debt rating and making financing more expensive. It would also result in higher interest rates for both consumers and businesses while causing millions of job losses.<\/strong><\/p>\n<\/blockquote>\n\n\n\n

While the CPI is helping alleviate inflation fears, fiscal policy risks are escalating. President Biden and Congressional leaders from both political parties appeared to make no progress yesterday on reaching an agreement for raising the debt ceiling beyond its current $31.4 trillion limit. Fearing that U.S. debt is becoming unsustainable, House Republicans recently passed the Limit, Save, Grow Act of 2023 which would raise the debt ceiling in exchange for restoring discretionary spending to 2022 levels and implementing a 1% annual cap on government spending increases. It would allow deficit spending to increase up until March 31, 2024, but with a $1.5 trillion limit. The bill would also reduce green energy subsidies and eliminate an extra $80 billion for improved tax enforcement. The bill has little chance of passing the Democrat controlled Senate and Biden claims it would reduce funding for law enforcement, border security and veteran benefits, while House Speaker Kevin McCarthy says Republicans will pass a bill to increase veteran benefits. Failing to lift the debt ceiling would result in the U.S. defaulting on its debt, causing a decline in the country\u2019s debt rating and making financing more expensive. It would also result in higher interest rates for both consumers and businesses while causing millions of job losses. A default, furthermore, would also lead to a lack of confidence in the U.S. On a positive note, Congressional leaders say they are hopeful that they can reach an agreement with the White House for increasing the debt limit. <\/p>\n\n\n\n

Earnings results continue to show that consumers are splurging on traveling, entertainment and other non-housing services while cutting back on purchasing goods as illustrated by the following examples:<\/p>\n\n\n\n