Last week’s economic news was dominated by inflation figures. On Tuesday, the Labor Department reported that the Producer Price Index (PPI) had risen more than expected in April, with a 0.5% increase and a 2.2% rise over the past year. The core PPI, which excludes food, energy, and trade services, rose 0.4% on an annual basis. While this was higher than economists’ consensus expectation, there were some encouraging details in the report. March’s PPI was revised lower to a -0.1% decline, while wholesale service costs only increased by 0.1% in April. Approximately 75% of the rise in the PPI for April can be attributed to a 5.4% increase in gasoline prices. Since there is little that the Federal Reserve (Fed) can do about global energy prices, this should not impact how the Fed views any potential interest rate cuts.
The following day, the Labor Department announced that the Consumer Price Index (CPI) had risen by a smaller-than-expected 0.3% in April and 3.4% over the past year. Economists had expected an increase of 0.4%, so the April CPI was seen as a relief. The core CPI, which excludes food and energy prices, rose 0.3% and 3.6% over the past year. Food prices remained unchanged, while energy costs increased by 1.1. The widely watched shelter cost component (owners’ equivalent rent) rose by 0.4% in April, maintaining the same pace as in the previous two months, meaning there is no significant relief there. On a positive note, Treasury yields declined following the release of this news.
This week will see the culmination of the first-quarter earnings announcement season with Nvidia (NVDA) reporting after market hours on Wednesday. Analysts’ expectations are extremely high, forecasting annual sales growth of 251% and annual earnings growth of 425. Although Nvidia has reported earnings surprises ranging from 11.4% to 29.2% in the past four quarters, the stock is priced for perfection and trades at a valuation of 31.8 times forecasted 2026 earnings. Since Nvidia is one of my largest holdings in managed accounts, I am hoping for another strong earnings report and positive guidance. However, the stock already carries heavy call-option premiums, which can sometimes lead to profit-taking when there is heavy call-option writing, so I will be watching Wall Street’s reaction closely to Nvidia’s quarterly results and guidance.
Here are some of the most important market news items and what this news means.
1. Despite weaker economic growth due to lackluster retail sales, plummeting consumer confidence, and contracting ISM purchasing manager surveys for both manufacturing and service sectors, the Atlanta Fed is still forecasting 3.6% second-quarter GDP growth due to inventory rebuilding and robust energy exports. Nonetheless, consumers are becoming increasingly restless and upset over higher food and energy prices, along with widespread protests at colleges, which has caused Joe Biden’s re-election chances to plummet. However, Joe Biden will attempt to revive his faltering campaign in a debate against Donald Trump on June 27th. The biggest challenge for Joe Biden may be if Ukraine’s second-largest city, Kharkiv, falls as Russia continues to seize more Ukrainian territory, potentially pushing crude oil prices above $100 per barrel.
2. If Ukraine, which is growing increasingly desperate, were to sabotage its own gas pipelines and blame it on Russia, this could lead to a spike in energy prices and further inflationary pressures. In such a scenario, the Fed would be more likely to raise interest rates rather than cutting them, as higher oil prices would signal stronger economic growth.
3. Fortunately, most of these economic challenges can be addressed through key interest rate cuts by the Fed. The FOMC statement and updated “dot plot” on June 12th should provide some guidance on when the Fed plans to follow Treasury yields and implement key interest rate cuts. The Fed is known for cutting rates before Presidential elections because it does not want to become a part of political debates. During June, there will be a lot of central bank news, the annual Russell realignment, and quarter-end window dressing.