The bond market took a hit after the release of April CPI which came in a bit higher than expected on higher rents, medical care, and the NYC transit fare hike. 10-year note futures are down over half a point from pre-CPI levels. Eurodollar futures are down 5-6 bps. Does this print bring the Fed closer to hiking rates? Higher rents is a good thing for the housing market, and the Fed's move to higher rates must be accompanied by strength and stability in housing. But medical care costs and NYC transit fares are not going to concern the Fed.
S&P futures were hit down 0.3% post-CPI, but after opening, the market is back to flat. The stock market should have a positive reaction to this data, because the Fed tightening is all depend on housing in my opinion. Existing homes sales came out weak yesterday, and the bond market had a nice rally on that which has been reversed today. If the Fed hikes on economic and housing strength, the stock market should not have a materially adverse reaction. The Fed wants a strong housing market, so they will be careful to try to avoid knocking out any growth in housing with their rate hikes. The USD is stronger. Stocks need to shake of their habit of immediately reaction to data through the lense of the Fed rate hikes. The Fed is going to tighten. There is very little doubt about that. A 50 bp Fed Funds rate is not restrictive. Discretionary stocks and financials should benefit as well as other cyclical stocks except commodity stocks which will be hurt by the stronger USD. I think the market should be up on this CPI print.
On the company level, FL had a good earnings report strong comp store sales up 7.8%. Retail has been a nightmare, so it's good to see one retail stock showing strength. ROST also had a good report yesterday after the close. I like both those stocks, but I don't like retail in general. FL & ROST are the only retail stocks I would buy right now.
Michael Grove, CFA