Energy, Used Cars, Inflation, Oh My!
We wanted to reach out to you all and give some thoughts on the volatility we have experienced this week and especially during the last two trading days. To begin with, this is what the markets have been fearing since the last round of volatility we suffered in February/March of this year when the 10-year Treasury yield traded from 1% to 1.778% in a month’s time. Since then, the yield has traded in a range from around 1.50% to 1.75% and it continues to trade within that range even after today’s news.
What news do I speak of you ask? Well, the headline inflation number for April was released today and registered a whopping 4.2% jump vs April of 2020, the largest gain year-over-year since 2009. The core CPI number (excludes the more volatile energy and food sectors in its calculation) was up 0.9% month-over-month, the largest one month pop since 1981. Regarding the headline number, it is important to note that it was measured against the number from April 2020, which was three weeks into the Covid shelter-in-place orders, and inflation was at a very low number of 0.3%. In addition, buried within the numbers was the fact that energy was 25% of that 4.2% jump. Of that 25%, gasoline accounted for 50% of that number. Gasoline prices had been rising but the ransomware attack on the Colonial Pipeline on the east coast caused prices to skyrocket. Those prices should moderate as the pipeline came back online this afternoon. The other category that drove the headline number higher was used cars and trucks whose prices rose 21% year-over-year.
When examining the core CPI number, it excludes energy for the very reason that today’s number demonstrates, it can be extremely turbulent in its price action. However, used car and truck prices are not excluded from Core CPI and that sector accounted for nearly a third of the 0.9% month-over-month increase reported today.
This is not to say that there isn’t inflation. Commodity prices have been steadily rising and items such as corn and copper have seen explosive increases in price. However, one month does not a trend make. The May 2020 headline number was only 0.1% so we could see another huge jump year-over-year when the May 2021 number is released on June 10th. The Fed presidents and Chairman Powell have all been on message saying they will not be raising interest rates until inflation averages 2% annually and employment has reached levels closer to pre-pandemic (we have another 8 million or so jobs to recover to reach that point). Let’s see what the May and June numbers bring. If we are still talking about record setting jumps in the headline and core numbers going into the third quarter, then at that point, the Fed’s hands may be tied, and asset purchases may have to be scaled back.
Lastly, I think it is important to remember that as of the week ending May 8, 2020, the markets were at the following levels: Dow 24,331 (today’s close 33,587) NDAQ 9,121 (today’s close 13,031)and the S&P 2,929 (today’s close 4,063).
As usual, should you have any questions or concerns regarding today’s price action, the information above, or your portfolio in general, please do not hesitate to contact us.
-Marin Wealth Advisors