We got a hot April Consumer Price Index (CPI) number, driven in a big way by energy costs, but even core CPI was surprisingly high, driven by a jump in shelter costs for the first time in a while. The April Producer Price Index (PPI) was even further above estimates.
On May 12th, the market staged a meaningful pullback after the CPI print but was in recovery mode by midday on the 13th, with a big bounce in semiconductors and the Dow closing in the green.
Interest rates rose materially. The PPI print, which left the year-over-year (YoY) headline PPI at a very uncomfortable +6.0%, the highest since February 2023, has had a much more muted impact.
The whole market dipped into the red on the PPI print, but the NASDAQ and S&P were back in the green after the first hour of trading. Semiconductors, the QQQ, and the Magnificent 7 finished trading on the 13th in the green, while the Dow and equal weight S&P 500 were only down slightly. This market wants to trade up, even with a 30-year U.S. Treasury yield above 5%, the highest since January 2023.
U.S. Treasury yields are inching higher on the back of the inflation data, but not as much as one would expect. The 10-year is now above 4.45%, while the 2-year is above 4%. Kevin Warsh, now the new Chairman of the Fed, can’t think of making a near-term cut in the Fed Funds rate. The Fed cannot cut key interest rates while Treasury yields rise, so if this gets worse, Treasury Secretary Bessent and incoming Fed Chairman Kevin Warsh may have to take some extraordinary action to get yields lower in the upcoming months.
Related: Hot inflation report throws cold water on Fed rate cuts
Tech is saving the market once again
Tech and communication services are firmly in the green. The only other sector not in the red is basic materials, as precious metals are up across the board, led by silver +17.3% in a month, copper +11.4% in a month to yet another all-time high. Gold is actually down 1.7% in the last month, not having the industrial demand of the other two.
Helping the enthusiasm for tech is Trump’s meeting in China, where the other participants, like NVIDIA (NVDA) CEO Jensen Huang and Tesla (TSLA) CEO Elon Musk, are seeing their stocks rally strongly today in hopes of new business deals. NVIDIA has hit a new all-time high, up +20% in a month, now worth over $5.5 trillion.
The higher interest rates are causing damage in real estate and dividend stocks. The winning sectors today are growth and momentum, which means AI plays. Traditional utilities are down, but alternative power suppliers are up. It’s an AI market, and it’s leaving non-AI names in the rearview mirror.
Low volatility stocks are the only group that is down for the year, while growth and momentum are the only groups up double digits. While this kind of concentration has a history of being bubbles, this time the companies that are fueling the move are the biggest in the market with rock-solid balance sheets and huge profits.
The wall of worry may be growing, but the momentum of hundreds of billions of spending on the AI build-out should keep things moving in the right direction, at least for the balance of the year.
