Image Source: Pixabay

Shift In Expectations

Peak inflation is in.

CPI numbers came in below forecasts this morning, both headline and core were 0.2% below estimates: Month-over-month CPR was flat instead of the 0.2% forecast (8.5% y-o-y) and Core was +0.3% vs 0.5% forecast (5.9% y-o-y), easing concerns for an even more hawkish Fed, best reflected by the shift in expectations for the next Fed increase in September from 75bps to 50bps, with 50bps now considered a 2/3 likelihood from 1/3 before the CPI numbers. Admittedly, the 75bps move was only expected after last week’s surprise hot jobs numbers.

Stocks responded sharply and positively immediately, with the Nasdaq up over 2% this morning, as was the Russell, and the S&P 500 and Dow up over 1.5%. The VIX has fallen nearly 8% to just over 20 a level it hasn't seen since February.

The repercussions of evidence of peak inflation are best reflected in the bond market with the 2-year US yield dropping a huge 18bps to 3.10% and the 10-year down 8bps to 2.72%. The US dollar is down 1.3% on the lower rates. Both crude oil and gasoline are softer, while natural gas is higher and energy stocks are lower today.

Pressure Off P/Es

Chips stocks have bounced after yesterday's sell-off on the Micron guide down. Lower interest rates take pressure off P/E multiples.

While today's bounce is on the heels of the lower-than-expected inflation numbers from July, the recent run-up - the S&P is now up 15% off its June low - was driven in part by expectations of lower inflation trends given lower commodity prices, especially gasoline, and was largely priced in, leaving the market more vulnerable to a surprise hot inflation number than coiled for a huge bounce on lower inflation numbers.

The Big Picture

Nevertheless, the big picture is now that earnings continue to grow, along with jobs, and that while inflation remains high it has flattened and should continue to ease as the lower commodity prices flow through the economy.

The question is can companies continue to grow earnings in a mid-single-digit interest rate environment with high single-digit inflation? Many well-managed companies can. Continue to add to positions.

More By This Author:

Home Depot, Lowe’s On Track To Grow 2022 Earnings
These Were The Five Best And Worst Performing Mid-Cap Stocks In H1 2022
5 Best And Worst Performing Large-Cap Stocks In June 2022