Photo by Steve Johnson on Unsplash This morning’s hotter-than-expected inflation data is falling on deaf ears as equity traders instead focus on Oracle’s positive artificial intelligence (AI) statements from the company’s earnings call last night. Bond traders are cautious though, demanding more compensation in light of accelerating price increases ahead of a 10-year note auction this afternoon. Overall, however, market participants doubt that Fed Chair Powell is troubled by 3% inflation considering his dovish rhetoric at last week’s Congressional testimonies, when he emphasized that rate cuts are right around the corner.

Price Gains Pick Up Steam
Inflationary pressures accelerated for the fourth consecutive month in February with the overall level of prices rising 0.4% month-over-month (m/m) and 3.2% year-over-year (y/y) from 0.3% and 3.1% in January. The pivotal core segment, which excludes food and energy, rose 0.4% m/m and 3.8% y/y from 0.4% and 3.9% during the previous month. Most figures arrived hotter than expectations with the Street projecting 0.4% and 3.1% for headline and 0.3% and 3.7% for core.

Gasoline Costs Shift from Laggard to Driver
While this morning’s report depicted broad-based price increases, gasoline costs shifted from a headwind to a tailwind, rising for the first time since September. Indeed, gasoline led the charge last month, increasing 3.8% m/m while transportation services was the second-largest gainer, increasing 1.4%. Other significant categories and their noted increases included the following:

Food at dining establishments and medical care commodities rose a modest 0.1% each while food at markets was unchanged. Prices for new automobiles and medical care services both declined 0.1% during the period.

Barely Any Disinflation Last Month
Across the major segments of services, goods, and commodities, nothing worked for the disinflation narrative last month, with all three categories threatening the Fed’s 2% inflation target. Among services, the labor-intensive categories continued experience cost pressures from strong wage growth, low labor force participation and an abundance of job openings. Shelter keeps rising, meanwhile, with home purchases and lease renewals, which are two of the sectors three largest components, reflecting no signs of slowing down. Homebuyers must contend with the least favorable mix of mortgage rates and prices in history that is badly hurting affordability, while landlords are pressured by rising interest expenses as well as higher costs for insurance, maintenance, labor, materials, etc. The cost dynamics are leading landlords to raise rents on renewals while managers of newly developed apartment complexes are offering rent concessions. Still, however, a minority of people move on a yearly basis, leaving most of the market overly exposed to home purchasing and lease renewals from an inflationary perspective. Over in goods and commodity land, looser financial conditions, lighter interest rates, geopolitical tensions, and Red Sea disruptions have complicated the inflation picture from both a demand and supply side. For the disinflation narrative to gain further steam, goods and commodities will need to cooperate this year, after paving much of the path last year. 

AI and Travel Grow but Retail Fizzles
Demand for AI services is supporting the growth of cloud computing while strong travel trends combined with price increases are helping to partially offset the impact of bad weather for ski resort operator Vail Resorts. Meanwhile, weak consumer spending on goods is weighing upon results for Kohl’s department stores. These trends are illustrated in the following earnings highlights:

AI Propels an Equity Rally as Bonds Reverse
Stocks are up and bonds are down today as equity traders focus on AI while fixed-income players assess inflation’s stickiness. All major US equity benchmarks are higher, led by the Nasdaq Composite and S&P 500 indices, which are up 1.2% and 1%. The cyclically tilted Dow Jones Industrial and Russell 2000 baskets are up a milder 0.6% and 0.1%. Sector breadth is positive with technology, consumer discretionary, and communication services leading; they’re up 1.5%, 1% and 0.9%. The only laggards are utilities, real estate, and materials, which are lower by 0.4%, 0.1% and 0.1%. Yields and the dollar are loftier on the back of increasing inflation expectations. The 2- and 10-year Treasury maturities are trading at 4.60% and 4.15%, 6 and 5 basis points (bps) higher on the session. The dollar is gaining as the US currency appreciates against all of its major developed market counterparts including the euro, pound sterling, franc, yen, yuan, and Aussie and Canadian dollars. The greenback’s index is up 22 bps to 103.07. Meanwhile, in the energy space, an upbeat demand forecast from OPEC+ is leading to firmer oil prices, with WTI crude up 0.6%, or $0.50, to $78.58 per barrel.

All Eyes on the Dot Plot
Today’s CPI results have increased the significance of the Fed’s release of its Summary of Economic Projections, or dot plot, next Wednesday. Even with four consecutive months of CPI increases, investors are anticipating that the central bank will cut rates in June and make an additional two cuts by year-end. The Fed’s dot plot will provide insight into how realistic these expectations are with some members of the Fed implying that one or two cuts this year may be sufficient, rather than the three the market is pricing in. This Thursday’s retail sales and wholesale inflation reports may provide members of the central bank with more evidence in one direction or the other. In the meantime, however, patience appears to be the predominant theme at the Fed these days. A few other hot reports are likely to push back the first rate cut to July, extending our journey across the monetary policy bridge.More By This Author:Poised For A Post-Jobs Rally ‘Til NVDA Spoiled The FunMarkets Recover On “Peak Fed Funds”The Fantastic Four Beats The Magnificent Seven