April's Producer Price Index (PPI) inflation reading came out hotter than expected with core PPI rising 0.5% month-over-month and 2.4% year-over-year. Newton Investment Management Chief Investment Officer and Head of Equity John Porter joins Catalysts to discuss what this print means for the potential for interest rate cuts from the Federal Reserve moving forward.
"What the markets clearly want to hear from him [Fed Chair Jerome Powell] is that he's committed to a path where the next move in rates is down," Porter says, adding: "I think the Fed knows that underneath the covers of an economy that looks pretty strong on the surface, there are some unmistakable challenges from the current level of interest rates," pointing to the housing market and small business formation numbers.
Porter also reflects on the current earnings season, calling results "very strong" across the board as the average company in the S&P 500 (^GSPC) beat earnings estimates by 8 to 9%.
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Melanie Riehl
Video Transcript
Is new inflation data showing that prices are remaining stubbornly high producer prices coming in above estimates across the board.
The core number which excludes food and energy rising 510 of a percent month over month.
That is compared to the 0.2% rise that was expected the revisions in the prior month, lessening that impact of the surprise here.
So what could this mean for the fed and for markets joining us now on this, we have John for new Investment Management, Chief Investment Officer and the Head of Equity John, thanks so much for being here.
We are expecting to hear from that chair Powell any second this morning?
I'm curious from your perspective, what does he need to address from this PP I, if anything?
Well, from this print in particular, I don't think he really needs to address anything but what the markets clearly want to hear from him is that he's committed to a path where the next move in rates is down and I I don't think that we're going to hear him wavering from that narrative.
All I think that that's the primary area of focus right now is, you know, a focus on when the next cut is not.
If, if the market starts to debate the possibility of rate hikes that becomes a much bigger challenge for the market to digest.
In my opinion.
Is that something that you think is on the table?
John, I don't think it's on the table at this point.
I think the fed knows that underneath the covers of an economy that looks pretty strong on the surface, There are some unmistakable challenges from, from the current level of interest rates.
We certainly see it, seen it in the turnover of exist homes.
For example, you're seeing it in some of the small business formation numbers.
You're seeing it in small business confidence.
So I think underneath the surface, they know that the higher rates are really pinching some corners of the economy, but the agri economy is solid right now.
Well, I want to switch gears a little bit to talk about the earnings cycle.
Our colleague Josh Safe for has a story out on how earnings growth for the S and P would be over 8% versus the 5% move if it wasn't for Bristol Myers earnings, how do you ride the momentum of this market as we're wrapping up the earnings season?
And as we know that one stock can put that much of a damper on any momentum from the earnings rally.
That's, that's absolutely true.
There's a, there's a handful of stocks that because of this the, the magnitude of their earnings, they can, they can distort the, the, the, the total picture.
But I think if you step back and look at earning this earnings season, it was a very strong earnings season across the board on average in the S and P 500 the average company beat earnings estimates by somewhere in the neighborhood of 8 to 9% which is about double the normal, uh, beat rate.
So this has been a strong earnings season.
And importantly, it's, you know, well, there have been a handful of very large companies that have had a big impact on that.
The breadth of the earnings improvement has is continued to improve.
And I think that's leading to a bit of a broadening out of the market.
So that as the earnings season does start to wane here, I know that you said that that's responsible for a lot of the momentum.
What will be the next catalyst for the market is earnings does wrap up?
I think we're back to focus on the macro as, as you mentioned earlier, Madison today, the, the, the the detailed analysis of, of PP I, we're going to get CP I tomorrow, there's going to be continued focus on the macro.
It's really remarkable to me that we're, we're sitting here in, in mid May with a broad market up eight or 9% so far.
And, and we've gone from an expectation of of six rate cuts at the beginning of the year now, just one or two, the resiliency of the market in the face of of much more modest rate cut expectations is very impressive to me.
I think the the focus is going to continue to be on all the inflation headlines to assure us that the next move is down when it's going to happen is a very difficult question to answer.
But as long as the market continues to feel the next move is down, I think you've got a good support for the, for the broad market here.
High rates pose 'unmistakeable challenges' for economy - Yahoo Finance
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