Is CPI Decelerating A Problem?

1.) OIL – On July 2, I commented that “If oil is going to bounce, this is near the spot where it would likely happen.” That was when WTI (oil) was trading at about $70/barrel. On July 8, I mentioned that managed short positions were signaling very high readings, which can often spell an intermediate-term bottom and the potential for a rally. At that time, I said, “Oil up toward $85/barrel would not be a massive surprise…” Well, here we are with WTI trading this AM over $81/barrel. Does it have more in the tank? Again, it would not surprise me. It now has some short-term momentum behind it AND oil volatility spiking to 60. That’s high…but it can go a lot higher too. It was up at 125 in March. The bottom end of the trend is at $87 and ranges up to $94, which can act as a magnet in instances like this. Short positions are still elevated, giving some tailwind to oil. Now, if oil reaches those levels, does it fail? It would not surprise me.

2.) CPI – No surprise that CPI decelerated pretty strongly with a core monthly rate of -0.4% and a year-over-year rate of 3.5%. Oil indicated that would happen. Consensus was at -0.1% and 3.8% for MoM and YoY. What’s next? Well, if oil continues to move higher, we’ll end up getting a bit of reflation for July (reported in Aug). So far, the US Treasury 2 YR Yield is indicating that the market expects a rate hike yet this year as it reached a new high yesterday. The CPI data that came out this morning is pulling the rate down, but so far nothing is changing its trend. The US 10 YR reached a lower high yesterday but is still above trend, giving it an upward bias.

3.) CONCENTRATION – Investors are being warned again that the U.S. stock market is too concentrated. The biggest companies are too big. The top 10 stocks control too much of the S&P 500. Apparently, this is all very dangerous. There’s just one problem. Compared with almost every other major stock market in the world, the United States is not especially concentrated. In fact, the U.S. is actually one of the least concentrated. Among the 20 largest stock markets in the world, only Japan has a smaller share of its market controlled by its 10 biggest companies. Japan’s top 10 stocks make up about 30% of the country’s main investable stock market. The top 10 in the U.S. make up about 36%. That means 18 of the world’s 20 largest stock markets are more concentrated than the United States. Canada is around 45%. Taiwan is above 50%. France is close to 60%. Germany is above 60%. South Korea is around 66%. Hong Kong is above 70%. Spain is close to 76%. For all the complaints about our giant companies, we still have one of the deepest and least concentrated stock markets on Earth. That’s not the story most people are hearing. Throughout 2023, the New York Stock Exchange Advance-Decline Line has been making new highs. That indicator keeps track of how many stocks are rising compared with how many are falling. If only a few giant companies were carrying the entire market, that line would probably be struggling. The equal-weight S&P 500 has also been making new highs. That version of the index gives every company the same importance. This is also why comparisons with the late 1990s need to be handled carefully. Back then, technology stocks were doing most of the work. Market breadth had been getting worse. Fewer stocks were participating even while the major indexes kept rising.