Last week was all about inflation. On Tuesday, the Labor Department announced that the Producer Price Index (PPI) rose by a stronger-than-expected 0.5 percent in April and 2.2 percent in the past 12 months. April’s core PPI, excluding food, energy, and trade, rose 0.4 percent and 3.1 percent in the past 12 months. Although this was substantially higher than the economists’ consensus expectation, the details were encouraging. The March PPI was revised lower, to a -0.1 percent decline, while wholesale service costs rose only 0.1 percent in April. About 75 percent of the April rise was due to a 5.4 percent increase in gasoline prices. Since there is little the Fed can do about global energy prices, this should not change how the Fed views any future interest rate cuts.
The next day, the Labor Department announced that the Consumer Price Index (CPI) rose by a smaller-than-expected 0.3 percent in April and 3.4 percent in the past 12 months. Economists were expecting a 0.4 percent gain, so the April CPI was a relief. The core CPI, excluding food and energy, rose 0.3 percent, and 3.6 percent in the past 12 months. Food prices were unchanged, while energy costs rose 1.1 percent. The widely watched shelter cost component (owners’ equivalent rent) rose 0.4 percent in April, the same pace as in the past two months, so there is no significant relief there. The best news is that Treasury yields declined on this news.
This week, the finale for first-quarter earnings announcement season will come from Nvidia (NVDA) after-market hours on Wednesday. Analyst expectations are beyond high, with 251 percent forecasted annual sales growth and 425 percent forecasted annual earnings growth. Although Nvidia has posted 11.4 percent to 29.2 percent earnings surprises in the past four quarters, the stock is priced for perfection and trades at 31.8 times forecasted 2026 earnings. Since Nvidia is one of my largest holdings in managed accounts, I am rooting for another nice earnings surprise and positive guidance, but the stock already carries heavy call-option premiums. When there is heavy call-option writing, sometimes the “tail wags the dog” and profit-taking ensues, so I will be watching Wall Street’s reaction to Nvidia’s quarterly results and guidance.
Here are the most important market news items and what this news means:
• Despite sputtering economic growth due to lackluster retail sales, plunging consumer confidence, and contracting ISM purchasing manager surveys for both the manufacturing and service sectors, the Atlanta Fed is still forecasting 3.6 percent second-quarter GDP growth due to inventory rebuilding and robust energy exports. Nonetheless, consumers are restless and upset due to higher food and energy prices, plus all the protests at colleges, so Joe Biden’s re-election chances have plunged. However, Joe Biden will try to turn around his sputtering campaign in a debate with Donald Trump on June 27th. The biggest problem that Joe Biden may have is if Ukraine’s second-largest city, Kharkiv, falls as Russia seizes more Ukrainian territory, which will likely send crude oil prices over $100 per barrel.
• If Ukraine, which is increasingly desperate, sabotages the Russian Arctic oil pipelines, crude oil prices will likely surge. Despite tough talk from France and other NATO nations, I suspect that NATO will not defend Ukraine, since it would be a major escalation. So, I suspect that energy stocks will be the best-performing stocks in June.
• The recent heatwave that hit much of the U.S. has caused natural gas prices to surge since natural gas power plants’ demand rises for air conditioning. Furthermore, LNG prices are now at the highest level this year as Asian demand remains high. This is helping broaden the breadth and power of energy stocks, which remains the strongest-performing sector this year.
• In addition to energy stocks, the companies that support the expansion of electricity generation to support growing demand from cloud computing and EVs are prospering. Specifically, Eaton Corporation (ETN), Emcor Group (EME), Quanta Services (PWR) and Vistra Corporation (VST) are helping utilities manage higher electrical loads. The recent electricity disruption in Houston to almost a million customers demonstrated how fragile the utility grid is during extreme weather. Additionally, companies that are supporting and helping to provide security for cloud computing, like Crowdstrike Holdings (CRWD), Nutanix Inc. (NTNX), Parsons Corporation (PSN) and Vertiv Holdings (VRT) are also prospering as AI takes over the cloud.
Fortunately, most economic woes can be fixed with Fed key interest rate cuts. The FOMC statement and updated “dot plot” on June 12th should provide some guidance on when the Fed will follow Treasury yields and provide key interest rate cuts. The Fed is notorious for cutting before Presidential elections because it does not want to be part of the political debate. In the meantime, during June there will be a lot of central bank news, the annual Russell realignment, and quarter-end window dressing.
