2023-04-12 09:36:12 ET
Summary
- March headline CPI verified a touch cooler than expectations, helping the Fed's cause.
- Stock market futures rallied following the number while yields fell.
- Commodities have been strong lately, and a dollar drop post-CPI likely adds fuel to the agricultural commodity space.
The March CPI report revealed a 0.1% rise in inflation versus the +0.2% consensus forecast. The year-on-year reading verified at +5.0% vs a +5.1% expectation. At the core level, prices jumped +0.4%, matching the consensus forecast. YoY Core CPI also came in line with what economists were expecting at +5.6%.
March CPI: Cooler Than Forecast Headline Numbers
Monthly Change in Headline & Core CPI
It was the slowest annual increase in headline CPI since May 2021. Stock futures rallied immediately after the numbers crossed the wires while interest rates cratered – the 2-year yield plunged about 15 basis points while S&P 500 Futures (SPX) rose more than half a percentage point. Long-term interest rates were little changed, though.
Core CPI Contributors
A key component of the CPI report to monitor in the coming months will be used car prices. Private price trends show a clear tick higher, but the CPI’s calculation has many consecutive months of price declines in the space. If private data is right, this could put upward pressure on CPI later this year.
Used Vehicle CPI Continues To Show Declines, Bucking Other Data
Coming into the report, Goldman Sachs expected stocks to jump on a weak CPI print while a hot number could have led to a significant move down in the SPX. With the coolish number, the implication is that equities should be able to hold gains today – recall how stocks wavered in the final hour on Tuesday, perhaps on jitters that the CPI data would be on the hot side.
Goldman Expects A Rally After The Cool CPI Data
But thus far in 2023, S&P 500 (SP500) moves on CPI Days have been nothing like what we experienced in 2022. Notice in the chart below that the typical change on the broad market has been less than 1% while still-large swings are seen on Fed Days and when the monthly employment report hits. So, CPI may be becoming less of a market-moving event.
Volatility On CPI Days Waning
Looking ahead, all eyes will now shift to PPI data, March Retail Sales, and corporate earnings season that begins in earnest on Friday when a host of major Financials sector companies report. The market may have a lot to live up to, as the S&P 500’s 1-month return in advance of the reporting period has been the best since 2009, according to Bloomberg.
Equities Strong Post-SIVB
In focus following today’s CPI report are agricultural commodities. The Invesco DB Agriculture Fund ETF (DBA) tracks an index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. Notice in the chart below that the exchange-traded fund ("ETF") has rallied to important resistance just below $21.
A move above that level would imply a bullish but measured price objective in the low to mid $22s – about where it traded a year ago during the massive commodity bull market when the ag space was in vogue amid geopolitical risks.
Today, with inflation easing, weaker U.S. real GDP growth expectations have also yielded a lower U.S. dollar, hence the rally in many commodities. Intermarket relationships are always in flux, but for now, there are tailwinds in Invesco DB Agriculture Fund ETF.
Overall, I'm a hold on DBA at the moment, but a close above $21 would support a technical trend of higher prices.
DBA: Monitoring Key Resistance
Driving the latest upward thrust in DBA is undoubtedly the steep climb in sugar futures. Sugar is now the top holding in the fund.
DBA Top Contract: Sugar
The sweet soft commodity surged from under $18 in Q4 to nearly $25 earlier this week.
Sugar Futures Jump To Fresh Highs
The Bottom Line
The March CPI report was another step in the right direction for the Fed and stock market bulls. While not sharply below expectations, the figures show a continued cooling of the inflation rate, assuaging fears of a consumer price spike that would drive the Fed to keep rates higher for longer.
For further details see:
CPI Continues To Cool, Equities Rally, DBA Commodities ETF In Focus