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Investors Not Scared by Higher CPI; Russell 2000 Lags

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This morning’s Consumer Price Index (CPI) report came in hotter than expected, as many investors feared it would. Yet the top three stock market indexes all closed in the green today. Dow barely squeaked by at +0.06%, but the S&P 500 gained 0.47% on the day, for an all-time record close the company had been eyeballing since Tuesday.

The Nasdaq won the day at +0.78%, +108 points and back up over 14K. The Russell 2000 lagged the field again this week, -0.68%.

We’re seeing rotation in stock trading picking back up over the past couple sessions. What was shaping up as a listless week overall has morphed into “risk-on” growth stocks back in favor. Tech and Healthcare were among the strongest sectors today.

Real Estate performed well again. Financials and Materials closed the day lower. Apparently, shining a light on the inflation that investors knew existed was enough for growth buyers to re-assert themselves.

Year over year, CPI grew 5.0%, the hottest rate since just before the mortgage-led financial crisis in August 2008. Core CPI (ex-volatile food & energy costs) was +3.8% year over year, the highest print in 29 1/2 years. Yet these numbers did not spook traders, especially those looking to buy strong tech firms at decent valuations — possibly before the market turns bullish overall again.

Though the Fed has held to the view that inflation was the cause of an abrupt return to businesses like homebuilding and microchip needs across industries. But we’re also seeing companies sweeten the pot to attract workers to open job positions by offering higher pay; those are the sorts of inflation metrics that do not tend to wind down in transitory fashion. Thus, we suspect a bit of our current inflationary condition may be stickier than some voting members of the FOMC may believe as of now.

Overall, it’s a good thing that the economy is continuing to grow, and that inflation may approaching its optimum 2%. Several weeks ago, when the yield on the 10-year ramped up quickly to 1.7%, there was some fretting that the 10-year — a back-of-the-envelope proxy for real inflation — might heat up beyond 2%, and too quickly. That appears to not at all be the case as of today: the 10-year bond yield is currently +1.44%.

Next week brings us heavier data on different aspects of the economy, from Retail Sales to the Producer Price Index to Industrial Production to Housing Starts. Until then, we might expect cooler trading volume as the summer trading months bring us another Friday, with no major reads — save Consumer Sentiment for June — until next Tuesday. We shall see if the indexes will be able to all close in the green for the week.

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