Stock markets liked that fact that the CPI could have been worse. But it was a mixed picture. The US CPI inflation print for April marked the first cooling in several months, with the headline print down to 3.4% from 3.5%. Core CPI inflation slowed 20bps to 3.6%, its lowest level since April 2021, with the month-over-month down to 0.3% after three months at 0.4%.  

Disinflation returns 

Supercore CPI (core services less housing) declined to +0.42% MoM in April vs +0.65% prior. Whilst it was the slowest monthly increase since December, recent monthly gains means the annual rate of supercore inflation rose to 4.9%, the highest in a year. This remains way too high for the Fed to cut next month. And services inflation remains very sticky and accounted for almost all of the headline CPI. 

Another measure, the Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly— increased 4.6 percent (on an annualized basis) in April, following a 5.0 percent increase in March.  

Whether the Fed has any say over these CPI prints is another matter entirely…a few tenths of a percent here or there is kind of meaningless – we are at 3-4% reality for inflation for a long time. The Fed will accept this – as said many times before – tacitly at first (where we are now) and then explicitly. That’s because we are entering an era of instability that will require ever-larger deficits to finance promises at home and abroad. Cuts are in the mail, even if supercore says ‘not in June’. 

US 10yr and 2yr yields dipped to their lowest level in a month and a half as markets moved to price in a faster pace of Fed cuts this year, with 50bps of cuts now priced.  

Gold rallied to its highest in a month as yields ticked down and the dollar hit its weakest in a month, slipping back on Thursday as DXY recovered the 104 handle after a brief move to the 103 handle. Silver broke out to test $30.  

Amid the marginally softer-than-expected CPI data we saw some weakness in the data elsewhere – Empire State mfg survey was bad and the retail sales control group declined 0.3%…sense that consumer spending proxies are rolling over. Whilst CPI was down, if we see the consumer roll over quickly we could be left with a more stagflationary environment. The Fed will have to accept inflation is going to be higher for longer soon enough as we move from the tacit to the explicit.  

I should note what BofA says though: “Stagflation was so 2022 … In our view, the key risk to watch is re-acceleration in (services) demand, not ‘stagflation.’” 

Retail sales indicate US consumer starting to falter 

Adjusted for inflation, retail sales have struggled for a while. Chart shows US total real (inflation-adjusted) retail and food service sales. (source: Macrotrends). 

Record Highs 

We have had a slew of all-time highs for stock markets this year and we got fresh peaks in the wake of the CPI. BofA says fund managers are the most bullish on stocks since November 2021. That’s shown up in a fresh all-time high for the S&P 500, Nasdaq and MSCI All Country World Index. The FTSE 100 notched its12th all time high close in a month, matching a record for the index. 

Copper High 

Copper broke out and smashed a record high, breaking above $5 a pound for the first time, with the May, Jun and Jul contracts all trading above this level mid-week before paring gains.  

But there has been a severe dislocation in copper pricing between London and New York, prompting traders to rush for supplies to deliver to the US. A short squeeze on the Comex over the last few days sent US prices to a significant premium – $1,200 a ton at one point versus the typical ~$90. This was related chiefly to futures markets and their occasional dysfunction. Comex copper rose about 10% to the record high even as London was relatively stable. There has been a lot of speculation in the copper market as investors bet on waning supply and increased demand. This has made the market more volatile– low inventories being a common concern for copper just as it has been for nickel and other commodities lately. The severe backwardation between the July and September contracts also pointed to a short squeeze on traders who’d bet on the NY-London spread narrowing being forced to buy back as the price rose. It’s also a fact that copper supply is tighter in the US, with the Panama Canal and Baltimore bridge collapse being seen as creating bottlenecks. 

There is some good coverage on this in the FT and Bloomberg. 

Copper has enjoyed a super-strong rally this year, rallying about 30%. There has not been enough investment in supply and everything we need from green stuff to munitions is super copper heavy demand-wise. I think we will see a major leg up, a doubling in the next 5 years is not unreasonable. It takes so long to develop mines that prices can remain very elevated for a while yet and demand is only rising. As GS put it last month, copper is in “the foothills of what will be its Everest”. There is just a not a version of the world over the next 20 years in which we don’t need a lot more copper. 

Copper matters: PPI for copper and copper products was stable from 1980 to 203, but has risen five-fold since. 

Softs Landing 

Extreme volatility in cocoa continued as prices plunged 19% in a day, the biggest drop in decades. Rain in Ghana, Ivory Coast and Indonesia is seen supporting crops. But investor Pierre Andurand predicts an extreme shortage of cocoa that could see prices melt up again in the same fashion that saw cocoa futures hit a record of $11,722 per metric ton earlier this year. Rabobank reckons that the peak has past for cocoa prices. 

China Selling 

Beijing sold more than $53 billion of Treasuries and agency bonds in the first quarter, according to Bloomberg’s calculations using latest data from the US Department of the Treasury. China selling when the Fed is approaching cutting is instructive about the country’s desire to diversify away from US dollar assets. It may well be accelerating as trade wars heat up with Biden slapping more tariffs on Chinese goods. 

Meanwhile, issuance is not stopping – financing promises at home and abroad. 

So let’s end with Ray Dalio, who spoke to the FT this week. 

“I am . . . concerned about Treasury bonds because of the high debt levels, which high interest rates are adding to,” he said. “I’m also concerned about the softening demand to meet supply, particularly from international buyers worried about the US debt picture and possible sanctions.” 

Neil Wilson

Chief Market Analyst at Finalto

All opinions, news, research, analysis, prices or other information is provided as general market commentary and not as investment advice and all potential results discussed are not guaranteed to be achieved. The information may have been derived from publicly available sources, company reports, personal research, or surveys. Past performance is not indicative of future performance. Trading carries risk of capital loss. Service available to professional clients only.