Peak Or Persist? Investors Parse April's Hotter-than-Expected 8.3% Inflation Jump

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(Wednesday Market Open) Stocks turned lower at the open and yields nudged higher after April’s 8.3% Consumer Price Index (CPI) gain convinced investors inflation hasn’t reached the peak most were expecting. It was a significant turnaround from overnight trading and a sign that the Federal Reserve has more work to do.

Potential Market Movers
CPI will likely sit center stage throughout today’s trading. Before the report, U.S. stock index futures were positive across the board, though April’s numbers sparked a quick reversal just before the open. After the CPI numbers, NASDAQ had turned an overnight 1.40% gain to a pre-open loss of 1.17%, while the S&P 500 lost 0.66% and the Dow Jones slid 0.40%.

Analysts had projected inflation would jump 8.5% for the month. This morning’s reading, though slightly lower overall, showed food and energy costs rose 0.6% in April, a big jump from March.

So much for reaching “peak” inflation. With these numbers still at 40-year highs, concerns remain that the Fed may have to increase its pace of rate hikes, though it’s worth noting that we’re now fixated on month-to-month numbers and not year-over-year.

However, what consumers think matters most, and though the job market is still healthy, this month’s inflation report has left their real wages down 2.6%.

Everyone wants the Fed to stick a “soft landing,” but that landing strip might be getting shorter.

Later in the day, investors will be looking closely at earnings reports from Toyota (TM), and Walt Disney (DIS).

Reviewing the Market Minutes
Stocks were mixed on Tuesday, providing some relief from three days of selling that caused the S&P 500 (SPX) to fall about 7%. However, the benchmark index was able to trim some of its losses and gain 0.25% to close at 4,001.

The Nasdaq Composite ($COMP) turned in the best day of the major indexes, gaining 0.98%. However, after falling more than 10% in the previous three sessions, it might not have felt like much. Additionally, the index failed to reclaim the 12,000 level broken on Monday, which could become a pivotal price point in the near future.

The Dow Jones Industrial Average ($DJI) was the only index to close lower on the day. It fell 0.26%, giving it a four-day losing streak of 5.7%. The major indexes were helped by strength from mega-cap stocks as the CRSP U.S. Mega Cap Index gained 0.32%.

Perhaps the biggest surprise of yesterday’s session was the 10-year Treasury yield (TNX) losing 86 basis points, which took the yield back under 3%. Yields were likely helped by a two-day, 10% drop in oil futures as well as investors looking for safer havens after the recent sell-off.

Many of the winners from the pandemic continue to struggle with disappointing earnings and/or guidance news—Upstart (UPST) plunged 56.4%, GoodRx GDRX plummeted 25.9%, SoFi SOFI dove 12.1%, and Peloton PTON fell 8.7%.

Tech led all sectors with the Technology Select Sector Index rising 1.53%. Energy and health care were the only other two sectors to finish the day in the green. The real estate sector continues to struggle as the Real Estate Select Sector Index lost 2.29%, making it Tuesday’s worst-performing sector.
CHART OF THE DAY: BREAK DANCING. The Real Estate Select Sector Index ($IXE—candlesticks) has outperformed the S&P 500 (SPX—pink) over the last year. However, over the last month, real estate has weakened against the S&P 500 in relative strength (green). Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch
Safe at Home? Historically, real estate has been a good investment during inflationary times, but recently, the Real Estate Select Sector Index hasn’t been living up to that reputation. Over the last year, the index was outperforming the S&P 500 (SPX), but in the last month, it has fallen 17.5%. Last week I reported that BofA Securities observed that the real estate investment trusts (REITs) that make up the index set a money-outflows record of $2.2 billion the week before the Federal Reserve’s rate announcement.

REITs are struggling with rising interest rates in at least three ways. First, REITs do a lot of borrowing, which means their cost of money is rising. Second, rising rates are weakening residential and commercial real estate markets by making investment more expensive thus pushing out potential buyers. Third, REITs are known for their higher dividend yields, which are completing with higher bond yields. While yields for REITs tend to be higher than bonds, they don’t offer the same degree of safety that most bonds do, particularly in a softening real estate market.

Hammering Home: Looking at a different aspect of the housing market, homebuilders have underperformed the S&P 500 (SPX) over the last year. The S&P Homebuilders Select Industry Index has fallen more than 24% in the last 12 months. It wasn’t long ago that homebuilders were doing great as the pandemic prompted many people to relocate or upgrade their properties. However, high home prices and rising interest rates are narrowing qualification rates for mortgage loans, reducing the number of buyers by 25%, according to the Joel Nelson Group. Additionally, Realtor.com reports that rising real estate inventories are reducing price pressures. This has caused homebuilders to focus on luxury homes and multifamily units.

From the Ground Up: The S&P 500 Construction Materials industry group broke below its 2021 lows on Monday and hasn’t been able to reclaim those levels. The measure is down more than 24% from its all-time high as investors anticipate slower construction. The S&P 500 Home Improvement Retail industry group broke support last Friday and is now down 28% from its all-time high.

These conditions could be bad news for home retail giants Home Depot (HD) and Lowe’s (LOW), which are set to report earnings next week.

Notable Calendar Items
May 12: Producer Price Index (PPI) and earnings from Brookfield BAM

May 13: Michigan Consumer Sentiment and earnings from Honda HMC

May 16: Earnings from Take-Two TTWO and James Hardie Industries JHX

May 17: Retail Sales and earnings from Walmart WMT and Home Depot HD

May 18: Building permits and earnings from Cisco CSCO, Lowe’s LOW, Target TGT, TJX Companies (TJX), and NetEase NTES

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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