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Good morning,

The pain trade is high, the VIX is dropping low, the NASDAQ is up after a strong retail sales report, and the S&P 500 has stayed at the same place you went Valentine’s Day – absolutely nowhere.

Markets have just been rattled by hotter-than-expected US PPI data, with headline at +0.7%. If you care more about the CPI and PPI data than markets do, we’re recapping.

Let’s dive in.

Economy Heat Check

As of 2/15/2023 market close, unless otherwise stated.

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Briefings

• A JPMorgan executive’s “creepy Disney princess” emails to Jeffrey Epstein were revealed (BBG)

• Tesla is sold out of the Model Y in the US for the quarter (Reuters)

• Binance will pay monetary penalties to settle existing U.S. investigations of its business, including with the DOJ and CFTC (Cointelegraph)

• The SEC has adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days to one (Reuters)

• Steve Cohen's Point72 bought 606,000 shares of GameStop (worth $11M, as of 12/31/22). In Jan. 2021, Point72 suffered at least 15% due to shorting GameStop (MI)

• The founder of WallStreetBets, Jaime Rogozinski, has sued Reddit for ousting him as moderator and over the trademark rights to the brand (MarketWatch)

Expectations Reset

The week in review:

• Retail Sales data for January came in stronger at +3.0% vs. the estimated +2.0% (prior -1.1%). Retail sales ex-autos, gas rose +2.6% MoM vs. the estimated +0.9%. Retail sales ex-autos rose +2.3% from the prior month.

• NY Fed’s Empire State stronger as the current business conditions index rose to -5.8 in February vs. -32.9 in January. Estimates only had the index rising to -18.0. New orders improved at -7.8 in February vs. -31.1 in January. The prices paid index jumped to +45.0 in February vs. +33.0 prior. The employment index dropped to -6.6 in February vs. +2.8 in January.

• Industrial output for January remains unchanged vs. consensus +0.5% (Dec. -1.0%). The capacity use rate decreased incrementally to 78.3% (Dec. 78.4%) vs. consensus 79.0%. January’s manufacturing output rose +1.0% (vs. est. +0.8%) and vs. Dec (-1.8%).

• Business Inventories for December rose +0.3%, in-line with consensus and the prior month. The U.S. December inventory/sales ratio was 1.37 vs. November’s 1.35. December business sales rose to -0.6% vs. November’s -1.2% (prev -0.8%).

• NAHB Housing Market Index for February showed confidence among U.S. single-family homebuilders. Confidence improved for a second straight month, rising seven points to 42 this month. It notches the largest monthly gain in nearly a decade (ex-Covid spring) above the estimated 37.

• The UK’s inflation rate slowed for a third month. It remains stubbornly high – in double digits, five times above the Bank of England’s targeted level. The Consumer Prices Index rose 10.1% from a year ago in January, the lowest since September, and down from 10.5% the month before.

• The U.S. could become unable to pay all its bills on time, sometime between July and September 2023, the nonpartisan Congressional Budget Office estimated. This gives lawmakers several months to reach an agreement on lifting the debt limit and avoiding a default. The Treasury Department ran up against the roughly $31.4T debt limit in January.

DEEP DIVE: US CPI vs. PPI

The only thing banks care less about than decent bonuses are recent economic releases. This morning’s PPI was no different.

The Producer Price Index, which measures what suppliers are charging businesses, rose 6% for the year ending in January. That’s down from December’s revised 6.5%.

Core PPI, which strips out volatile food and energy prices, was up 0.5% month-on-month after December’s advance of 0.3%. And the annual core PPI slowed to 5.4% from December’s 5.8%. Market consensus calls were expecting a slowdown to 4.9% in January.

These U.S. supplier prices rising from a year earlier signal still stubborn inflation pressures in the economy. Trading after the latest CPI was a hint of what’s to come.

Tuesday’s CPI release saw inflation rise 0.5% for the month and 6.4% over the past 12 months, according to the U.S. Bureau of Labor Statistics. The news was higher than some economists’ expectations, which had predicted 0.4% for the month and 6.2% year over year.

While PPI is an important economic indicator that provides insight into changes in production costs, CPI is generally considered more important due to its direct impact on consumers and the broader economy. As you’d glean from its name, the Producer Price Index can provide information about supply chain issues, disruptions or shortages. So PPI covers a different range of goods than CPI, such as those that are not directly for consumers.

In this latest CPI, notable increases included shelter, food, gasoline and natural gas, according to the BLS. More specifically, January increases came from motor vehicle insurance, recreation, apparel, and household furnishings and operations. Meanwhile, monthly declines in prices came from used cars and trucks, airline fares and medical care.

Unlike the report as a whole, data on the medical care sector was actually notable. Medical Services saw its biggest negative seasonal adjustment in times series history. This is a major reason why core services ex-shelter (Powell's main variable) printed at low levels.

That being said, the PPI and PCE measure medical insurance differently than the CPI. The quirk in the CPI data is due to a reliance on insurance company profits, which got hammered with the return of elective surgeries and routine test in 2021. It showed up as disinflation in CPI for October 2022.

What’s Next

There's still plenty of money on the sidelines that is still worried about missing the bottom of the market cycle than next month's CPI report. That’s not to mention all the money that ran scared late last year on recession fears that are now having a rethink. Plus, many are still competing with a bond market that's pricing in more rate hikes and the possibility that inflation will be sticky.

Ultimately, most don't have many clues yet on what 2024 inflation will look like and if the Fed is willing to tolerate, for example, 2.6% inflation in 2024 rather than hiking further to get it all the way back to 2% faster.

In any case, it's a massive tug of war right now and markets are along for the ride.

STILL TO COME: OpEx Week

OpEx Week is like bowling with inflatable gutter bumpers. And plenty will still find some way tomorrow to strike out.

OpEx Week refers to "Options Expiration Week," which is the week in which options contracts expire. During OpEx Week, there’s usually increased volatility and volume in the markets as traders and investors adjust their positions in response to expiring options.

In case you’re one of those TikTok investors who pretends FINRA doesn’t exist, here’s the rundown:

• Options are contracts that allow the holder to buy or sell an underlying stock at a given price.

• Call options confer the right to buy the underlying, while put options grant the right to sell.

• Changes in share prices influence the value of options, but the opposite dynamic sometimes also surfaces.

OpEx week has intensified over the past year as options activity surges to what journalists are quick to brand as “unprecedented” levels. Between day traders buying speculative calls, yield-seekers selling them, and institutional hedgers loading up on protective puts, options volume and open interest are soaring -- leaving market-makers struggling to absorb all the flow. Traders put them in a position to have a big impact on the market.

When both the PPI and CPI are released during OpEx week, it would be expected to increase volatility and volume even further. Overall, the impact of PPI and CPI releases during OpEx week will depend on a variety of factors, including the specific numbers released, overall market conditions, and the reaction of investors and traders.

For example, higher PPI and CPI numbers would indicate that inflation is rising, which could cause concern among investors and traders. That could lead to increased buying or selling activity as market participants adjust their positions to account for potential changes in interest rates or other monetary policies.

But as we all know by now, markets haven’t started caring about inflation quite yet or what Powell says he’ll do about it. This sentiment has led to a more muted market reaction in recent OpEx weeks.

At the very least, try to sit back and enjoy this month's OpEx week throwing a bit of range into a news cycle that's been owned by Powell and ChatGPT as of recent.

Meme Bank

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