CPI day (!!!), plus Bitcoin, Gold, mortgages, money markets, and investing vs. spending
The Sandbox Daily (3.14.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
Consumer Price Index (CPI) growth comes in as expected
Bitcoin breaks out
Gold back in the fold
majority of mortgage pool locked in historically low rates
money market flows are surging
investing versus spending
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +2.32% | Russell 2000 +1.87% | S&P 500 +1.65% | Dow +1.06%
FIXED INCOME: Barclays Agg Bond -0.59% | High Yield +0.73% | 2yr UST 4.246% | 10yr UST 3.685%
COMMODITIES: Brent Crude -4.09% to $77.47/barrel. Gold -0.43% to $1,908.3/oz.
BITCOIN: +3.29% to $24,716
US DOLLAR INDEX: +0.06% to 103.658
CBOE EQUITY PUT/CALL RATIO: 1.11
VIX: -10.52% to 23.73
Quote of the day
“Fear has a greater grasp on human action than does the impressive weight of historical evidence.”
- Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania
Consumer Price Index (CPI) growth comes in as expected
This morning, the U.S. Bureau of Labor Statistics released their Consumer Price Index (CPI) report in February. U.S. consumer prices in February rose mostly in line with market expectations.
Headline Inflation
CPI: +0.4% MoM, versus +0.4% estimate and prior month of +0.5%
CPI: +6.0%: YoY, versus +6.0% estimate and prior month of +6.4%
Core Inflation
CPI ex-food and inflation: +0.5% MoM, versus +0.4% est. and prior month of +0.4%
CPI ex-food and inflation: +5.5% YoY, versus +5.5% est. and prior month of +5.6%
Headline CPI (+6.04%) moved down for 8th consecutive month in the YoY rate of inflation and printed the slowest annual increase since September 2021 (+5.39%). Core CPI (ex-food & energy) moved down to +5.5%, the 5th consecutive decline in the YoY rate & the lowest level since November 2021. While prices are coming down, the rate at which its decreasing is slowing. The focus continues to focus on Core Services inflation (blue bar charts below).
Much of the narrative and attention has shifted to parsing between goods inflation versus services inflation. As the economy has reopened, consumer preferences and spending have shifted from goods spending to services spending. Core Goods CPI rose +1.0% YoY in February (vs. +1.4% in January), while Core Services continues to rise at a much higher rate (+7.3% YoY vs. +7.2% in January).
Shelter prices advanced +8.1% YoY, the most since June 1982, with rent specifically climbing +8.8% YoY, the most since August 1981. Since private rent surveys, such as Zillow, have already rolled over, shelter inflation will likely start to moderate later this year. The focus on Shelter as a category is extremely important because it represents 34.4% of the headline CPI basket.
Core CPI (+0.5% MoM) rose in February by the most in five months. While lower than monthly gains earlier in this cycle, this is still nearly double the average monthly change in the year prior to the pandemic.
Amid signs that the disinflation process is slowing, and following the creation of a liquidity facility to backstop bank failures, Federal Reserve officials are at a crossroads about the path of future rate hikes. The Fed must make a very difficult decision as the FOMC committee weighs still-rapid inflation against the banking turmoil currently roiling markets.
Source: Bureau of Labor Statistics, Dwyer Strategy, Ned Davis Research, Bloomberg, Liz Ann Sonders
Bitcoin breaks out
Bitcoin (BTC) is surging higher this week. It’s up roughly 25% over the past four days, marking its strongest four-day advance in more than two years. It broke out to its highest level since June today, testing a key level near $25,000.
Bitcoin has been rejected at this level several times over the past nine months, making this week’s price action very constructive.
BTC has built a massive base to launch higher, if and when the current breakout follows through to the upside. However, there is still more work to be done as price has retraced much of its early gains on the day and is trading back below $25,000.
Source: All Star Charts
Gold back in the fold
The record gold purchases of 2022 are in stark contrast to the 1990s and early 2000s, when central banks were net sellers of gold; since 2010, central banks have been net buyers of gold on an annual basis.
Gold plays an important role in financial reserves for nation states: balance foreign exchange reserves, hedge against fiat currencies, and diversify its portfolios.
Russia and China have been the largest gold buyers over the last two decades (1999 – 2021). Interestingly, the majority of nations on this buyer list are emerging economies. These countries have likely been stockpiling gold to hedge against financial and geopolitical risks affecting currencies, primarily the U.S. dollar.
Given the recent tumult roiling the banking sector on the heels of three separate bank failures, demand for gold is sharply rising – recording its highest short-term momentum readings since early 2020 as measured by the two-day rate of change (ROC). The technical setup for the yellow metal remains bullish based on this momentum thrust, and a retest of the prior February highs near $1,970 appears likely.
The potential culmination of the Fed’s rate hike cycle this spring should support a weaker dollar or, at minimum, limit upside in the greenback. If inflation proves stickier than anticipated, prompting the Fed to continue raising rates above market expectations, recession risk will rise and gold will likely benefit as both an inflation hedge and safe haven asset. Ongoing geopolitical tensions with Russia and China should also support gold, along with increased central bank demand.
Source: LPL Research, Visual Capitalist, All Star Charts
Majority of mortgage pool locked in historically low rates
60% of all mortgages outstanding were issued in the past four years at much lower interest rates than today, making the U.S. housing market less vulnerable to rising interest rates than in other countries.
So while the Fed continues to raise interest rates for the purposes of tightening financial conditions and slowing aggregate demand, much of the housing market is already locked into generational low interest rates where a large cohort of the population are neither buyers nor sellers.
Source: Apollo Global Management
Cash is king
U.S. money market funds are surging to all-time highs.
Given the volatility many investors are experiencing across most asset classes and the tremendous amount of headwinds facing the market, flows in 2023 are being driven into money market funds to achieve a respectable yield while waiting for clearer skies to emerge.
Source: Goldman Sachs, Daily Chartbook
Investing versus spending
Investing is the easiest way to become wealthy.
Instead of buying products of the companies you love, start buying their stocks.
Do you get more value being a customer or an owner?
Source: Compounding Quality
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.