Hotter Than Expected

Higher inflation (again)... Yields rise, stocks fall... Is that it?... What's 'priced in' and what's not... Oil's trade winds... Israel and Iran threaten each other... An alternative to the conventional madness...

Well, it happened again...

The latest inflation report from Uncle Sam this morning came in "hotter than expected"... The March consumer price index ("CPI") rose 0.4% for the month, making for a 3.5% year-over-year gain.

Notably, "core CPI" – which excludes food and energy and has some similarities to the Federal Reserve's preferred inflation measure, personal consumption expenditures ("PCE") – also accelerated by 0.4% in March and 3.8% from a year ago...

Add it up and it looks to me (Corey McLaughlin) that for the third straight month in 2024, the pace of inflation has tracked closer to 5% annualized than the Fed's supposed 2% goal.

Uh-oh.

Elevated inflation... a reported unemployment rate still below 4%... and first-quarter GDP estimated around 2.5% annualized... That leaves little room to argue that the Fed will cut interest rates anytime soon, as has been the prevailing market expectation.

And so volatility picked up today, like we saw during previous higher-than-expected inflation readings this year. This action was arguably more significant, though...

Today's action all said 'more inflation'...

The 10-year Treasury yield rose almost 20 basis points to above 4.5%, its highest level since mid-November. And the 2-year yield rose by 22 basis points to nearly 5%, also its highest since November (before expectations for rate cuts in 2024 became popular).

The small-cap Russell 2000 Index shed about 2.5% today, and the S&P 500 Index, tech-heavy Nasdaq Composite Index, and Dow Jones Industrial Average were off roughly 1%...

And suddenly, the U.S. Dollar Index ("DXY") – which measures the dollar relative to other major global currencies – is trading above its 200-day moving average and made a new high for 2024 today.

So, yeah, what we've repeatedly said could happen – higher-than-expected inflation – happened today.

So... what's next?...

Is that it? Has the market fully prepared itself for higher inflation?

Somewhat... But because nobody knows for sure, the market has left room for further pain if higher inflation rates – and no interest-rate cuts – move from a prediction to a certainty.

For the prevailing expectations regarding the Fed, I like to look at the CME Group's FedWatch Tool, which tracks the bets of federal-funds futures traders.

Today, bets on rates staying where they are through June rose to 83% from around 43% just yesterday. These same traders are now also increasingly putting odds on the fed-funds rate staying in a range of 5.25% to 5.5% at the Fed's following meeting in July... with the first rate cut coming in September.

For that to happen, it would likely take a series of more "normal" inflation readings – say, 0.1% to 0.2% per month – and/or a substantially weakening jobs market. Right now, it's hard to argue that the pace of inflation is not running "hot" – once again.

Weighing the possibilities...

As most Digest readers know well, the markets favor lower interest rates because they allow businesses to borrow money more cheaply. That's particularly important to startups that aren't making money yet... or other companies saddled with heavy debt loads. However, the Fed will keep rates higher if it decides the economy needs to cool off to reduce inflation.

It's possible the pace of inflation will slow again if energy costs stop rising. Oil prices have been up 20% since mid-December, which has reaccelerated the inflation data based on many metrics. Will they rise another 20%? Place your bets.

Either way, it's also entirely possible that this inflation pace will keep up as higher costs continue to "stick." For instance, in the CPI report today, shelter costs – which make up about a third of the headline data – rose 0.4% from last month and 5.7% from a year ago. That trend won't reverse overnight.

If current trends continue, that would upend the whole idea of high(er) 1970s-style inflation being dead and gone... and support the idea of more rate hikes possibly happening next instead of cuts. The market isn't showing any consideration of such a possibility.

We're not there yet. The Fed is still projecting cuts to come, and long-term trends for U.S. stocks remain bullish as the "Fed pause" trade remains popular. But the possibility of the inflation and market script totally flipping is on my radar.

We'll be watching how the market moves over the next few days and into next week to see if this sell-off is brief like others we've seen in 2024... or shows signs of being longer-lasting. Tomorrow brings producer price index ("PPI") data, covering costs for businesses, and the market reaction could be telling.

But as our Ten Stock Trader editor Greg Diamond wrote to his subscribers this morning...

One data point that isn't a huge outlier won't break this market, at least not from what I can tell right now...

Greg noted that semiconductor stocks were still going strong today, and it looked like "dip buyers" were stepping into the sector, including for chipmaker Nvidia (NVDA), which was up 1.5% today.

The trade winds for oil...

Oil prices are influenced by a variety of factors and expectations.

One line of thought is that lower interest rates typically stimulate economic activity, which can lead to higher oil prices.

And as I wrote last month, the International Energy Agency ("IEA") raised its view on oil-demand growth for 2024, tied to expectations for accelerating economic activity. Recall that the IEA purports to coordinate oil-reserve policy among 31 member nations, including the U.S., that account for 75% of global oil demand.

So, on one hand, you could argue in a roundabout way that higher inflation data today – leading to the prospect of delayed rate cuts (if they occur at all) – could dampen oil prices somewhat because economic activity may not be as strong as anticipated in the future.

Yet, right now, we're seeing economic activity and inflation greater than Wall Street has been expecting... and steady demand for oil.

Then there's the other side of the equation: supply.

The Saudi-led OPEC oil cartel, which controls 40% of global supply, seems intent on keeping prices as high as it can by encouraging a lid on supply from OPEC and so-called OPEC+ nations (including Russia) for the past year. As I also wrote last month...

Almost a year ago, in an April 2023 Digest, we wrote about how the "oil cartel is at again." Several large OPEC+ countries and others had announced an unexpected cut in daily crude-oil production that was intended to last through the end of the year... as they sought to goose the price of a commodity that they heavily rely on for income.

That story hasn't changed.

Now, there are signs of U.S. oil supply picking up. Today, the U.S. Energy Information Administration reported that U.S. commercial crude stockpiles rose by nearly 6 million barrels last week, and demand fell by more than 2 million barrels per day during the same period.

The wild card now, though, could be the warring in the Middle East. Conflicts there could potentially lead to an oil "shock" like the one we saw in early 2022 after Russia invaded Ukraine and the U.S. and its allies started talking about banning Russian energy imports.

Overnight, oil prices rose on news that Israel warned OPEC member Iran that it would attack if Iran attacked Israel (in retaliation for an alleged Israeli attack on an Iranian consulate in Syria last week).

"If Iran attacks from its territory, Israel will react and attack in Iran," Israeli Foreign Minister Israel Katz wrote on X, formerly Twitter, and tagged Iran's Supreme Leader Ayatollah Ali Khamenei to make sure he received the message.

He didn't need the alert. In a speech today in Tehran, Khamenei said, "Consulates and embassies of any country are regarded as the soil of that country. When they attack our consulate, it means that they have attacked our soil."

Iran produces around 4% of global oil supply, and its facilities could be in the crosshairs if tensions escalate. While 4% may not sound too significant, every bit of supply counts, especially if the market gets "tighter."

Also, if more missiles start flying across borders in the Middle East, additional nations like Saudi Arabia – which produces 13% of the world's oil supply – could become more directly involved in a war. Fortunately, this is still a hypothetical.

In the past 24 hours, the price of a barrel of West Texas Intermediate, the U.S. benchmark, and Brent crude, the international standard, were each up more than 1%.

Finally, if you're looking for an alternative to all this conventional madness...

As we explained yesterday, be sure to check out our Crypto Capital editor Eric Wade's brand-new free presentation. In part, Eric describes why a "Melt Up" in bitcoin is coming this year... and why the world's most popular cryptocurrency offers the "ultimate alternative to the U.S. dollar."

It's all very timely given the discussion of inflation reaccelerating in early 2024. As Eric explains, bitcoin is also about to experience a "reboot" in a matter of days that could strengthen the idea of the popular crypto being an inflation hedge and send its price soaring to $100,000 this year (and even higher beyond).

In part, this is why Eric says the bull market we've seen in cryptos this year – with bitcoin up almost 60% to new all-time highs and many lesser-known coins up by even more – is far from over.

And, importantly, there are ways you can position yourself to take advantage and book potentially "ridiculously high gains" of the kind that Eric has recommended for years in his Crypto Capital advisory, including and beyond the popular cryptos like bitcoin and Ethereum.

In fact, Eric has recommended more than 1,000% winners than any other Stansberry Research analyst, solely by using cryptocurrencies. And he now has so many big winners in our Hall of Fame that we're about to create a crypto-only Hall of Fame just for his picks.

If you're interested in cryptos at all – and we've long said there's a place for at least a small allocation in a portfolio – there's no better guy to follow than Eric. Not only does he do deep research on little-known "altcoins" that can deliver mind-blowing gains, but he also goes out of his way to walk subscribers through how to buy them and get started.

And he says now is the time to prepare for possibly the "last and biggest true mania" in cryptos, which could begin later this month. Check out his presentation for the details. If nothing else, you'll hear a free recommendation from Eric and learn his most important advice for navigating the volatile but potentially lucrative crypto market.

New 52-week highs (as of 4/9/24): Agnico Eagle Mines (AEM), Alamos Gold (AGI), Amazon (AMZN), Ascot Resources (AOTVF), Alpha Architect 1-3 Month Box Fund (BOXX), Dimensional International Small Cap Value Fund (DISV), iShares MSCI Emerging Markets ex China Fund (EMXC), Cambria Emerging Shareholder Yield Fund (EYLD), First Trust Natural Gas Fund (FCG), Freeport-McMoRan (FCX), SPDR Gold Shares (GLD), Alphabet (GOOGL), KraneShares MSCI Emerging Markets ex China Index Fund (KEMX), Kinross Gold (KGC), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), Ryder System (R), Sprott (SII), SilverCrest Metals (SILV), iShares Silver Trust (SLV), Teck Resources (TECK), Terex (TEX), TFI International (TFII), ProShares Ultra Gold (UGL), United States Commodity Index Fund (USCI), and Viper Energy (VNOM).

A quiet mailbag today... As always, send your notes, observations, and questions to feedback@stansberryresearch.com.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 10, 2024