VIDEO: Surprise July PPI Print Likely to Change Rate Cut Projection
As the market rethinks rate cut prospects, we’re watching for shopping list opportunities.
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In today’s Portfolio video, Chris Versace runs through the hotter-than-expected July Producer Price Index report and why it’s very likely that it will foster a market rethink on rate cut timing by the Fed.
We also use the July PPI report to showcase why we not only follow the data, as we like to say, but also why we do not put stock in any one data set. Coming off Thursday's data, Chris updates our near-term Portfolio plan and why we’re sitting on the sidelines near-term.
Transcript
CHRIS VERSACE: Hey, folks, Chris Versace here. It is Thursday, August 14. And if you happen to miss the July PPI report, I'm not really sure how you could given what we're seeing in the market today, but if you missed the July PPI report, both the headline and the core CPI figures came in. No matter how you look at it, sequentially year-over-year, hotter than expected. By the numbers, headline and core, they came in 0.9% month-over-month, much quicker than the market was expecting. And core was up 3.7% on a year-over-year basis.
Headline, 3.3%. Now, yes, they were much hotter than even we expected. But when we examine the data, we do see the pressure in the service sector. Now, I just have to say, for some folks that are let's just say, falling out of their chairs about this data, let's remember that when we got the last few services ISM services PMI reports, the pricing subindex data showed a sharp increase. And yes, we saw that again last week with the July ISM services PMI data, again, for the pricing sub index.
So I will say that were we surprised by the magnitude of the jump higher in the July PPI report? We sure were. But let's remember that the data that we get from ISM simply gave us a reason to think that the July PPI figures, when we got them today, were going to come in warmer than expected. And that is certainly what we got.
But let's just step back for a second, because this whole thing here that I just talked about, comparing the data from ISM against the PPI reports, both for the month of July, it really kind of reaffirms a few things for us. Not only is it important to follow the data, you've heard me say this many, many times, but it's extremely important to triangulate the data, meaning looking at multiple sources and not rely on any one data set. So that's the first thing.
Second, this data is really going to force the market to rethink the cadence and timing of rate cuts by the Fed. And when I say this data, it isn't just the July PPI report. Remember, earlier this week, we got the July CPI report. And while the market kind of celebrated its headline CPI coming in a tick better, when we examine the core CPI, boy, did that come in warmer than expected, with a three handle on a year-over-year print. So as I just think about it, it's really going to on a combined basis, really force the market to rethink that cadence, like I said, and timing of rate cuts the market was looking for September. I think this is going to raise some questions about that.
The third point is that coming off Atlanta Fed President Bostic's comment last night, that he only sees one rate cut this year, we're going to have to watch what other Fed speakers say, not just today, but tomorrow and early next week ahead of Fed Chair Powell's keynote at the Jackson Hole Symposium on Friday. As we get ready for that, let's remember that next Thursday, the day before Powell speaks, we will get the August flash PMI report. And it's going to be the last big data point that we get, or set of data points, I should say, inside the report for the speed of the economy, inflation and job creation. And let's remember too, it's also the first hard look at August.
So far, all the data that we've been talking about has been July-facing. Now, based on what we've seen so far, we would not be surprised if Powell's comments push back on near-term rate cuts. Remember, the market was thinking with almost 90% probability, according to the CME FedWatch tool, it would be in September. Now, odds are if we game it out, what is the Fed going to contemplate?
Well, it's going to want to see if the July PPI spike was a one-off. Or is it the start of something that continues, meaning at a minimum, they're going to want to see the August data. And at the same time, the other question is, wow, that spike in the July PPI data, is it going to flow through into the August or even September CPI data? So these are some of the questions I think the Fed is going to be contemplating giving the data of this week, especially that PPI report.
And in our view, no matter how you slice it, there is a high probability that Powell's comments next week will not be friendly to a market that expects the potential for three rate cuts this year. Now, let's talk about this as it relates to the portfolio. You know that over the last few weeks, we've kind of rebuilt our cash position. And even after we picked up some additional shares of American Express earlier this week, the cash position as of last night was hovering around 13% of the portfolio's assets. That gives us some cushion, but more importantly, that gives us some firepower as the market goes through this rethinking process.
We know it can get a little painful. It can get a little ugly in the short term. But remember, we have in the past used market pullbacks to pick up shares for the portfolio at sometimes very opportunistic levels. We're going to be mindful of that. We've shared our near-term shopping list, which includes incremental shares of Axon, ServiceNow, and of course, SuRo Capital. With SuRo in particular, boy, we do want to capture more of that dividend stream given its business development company nature.
So we will have to be patient and wait for some opportunities to present themselves as the market goes through this rethink. Again, not always easy in the moment, but we will be patient, pick our spots. With that in mind, I will say that we have much more coming your way, so please be sure to check your emails, check your alerts. And as I like to say, if we make any moves with the portfolio, we want to make sure that you are right there with us.
So it's another reason to please be checking your emails and your alerts. That's today's video. I'm going to get back to breaking down the data, as well as sharing some highlights from what Cisco had to say and some of the other investor conference comments that caught our eye over the last day or two. Thanks for watching.
