Why Stocks Are Surging And What Today's Core PCE Data Means For Next Month's CPI Print

Quite a few traders and algos were prepared to unleash a buying tsunami if today’s core PCE number missed as it would add even more pressure on the Fed to “pause” its hiking plans some time in September, as discussed here previously.

Is a core PCE miss about to spark a megasqueeze ramp

— zerohedge (@zerohedge) May 27, 2022

But while core PCE came in as expected on both a M/M and Y/Y basis, at 0.2% and 4.9%, respectively, stocks soared nonetheless, with the S&P rising 1.5% at last check and setting US stocks on track for the best weekly performance since mid March.

Why? Several reasons: first of all, printing at 4.9%, this was the first core PCE print below 5.0% in 2022.

Second, as EPB Research notes, we now have 4 consecutive months of annualized inflation declines (even if the actual print still remains too high for an actual capitulation by the Fed).

Third, while still clearly high, today’s inflation print was enough to give Biden the courage to issue a statement on the latest inflation trends, saying that while inflation remains too high, the “latest inflation data is a sign of progress” (adding that he will “give the Fed the independence to do its job”, which is funny because i) he has no other choice, and ii) Biden has been pressing Powell non-stop to cut inflation even if it means a market crash and/or recession).

But what is perhaps more important to markets, is that while today’s core PCE came in line with expectations, traders are already eyeing the June 10 CPI print which unlike today’s data, has a very high chance of missing badly, mostly thanks to the dramatic collapse in used car prices, which as Bloomberg calculates will shrink the “Used Car” contribution to Y/Y CPI from 0.68% to just 0.15%, the lowest print since August 2020!

And with demand destruction already crippling purchases of airplane tickets after last month’s record surge in air fares (“Runaway Airfare Inflation Is Starting To Cool Demand For Summer Travel, Data Suggests“), expect many more downside surprises in one-time price spikes (if not in food and gas, those are here to stay, but as a reminder, those are non-core prices according to the Fed and as such carry less weight as far as the market is concerned).

But perhaps the most direct reason why stocks have surged today is because as we noted earlier, the US consumer is officially tapped out: a few weeks after we reported that new credit card debt exploded to the highest level on record, which led us to speculate that US savings – either excess or any other kind – are now gone…

… today we got confirmation of just that, when the latest personal income and spending data revealed that the personal savings rate had unexpectedly collapsed to just 4.4% (from 5.0% last month) and the lowest since Sept 2008 when the world was about to end!

This matters because at a time when banks are starting to tighten credit card (and C&I, and mortgage, and all other) lending standards due to the upcoming recession and QT, with credit cards already maxed out and with savings virtually gone, US consumers no longer have the dry powder to sustain the relentless shopping spree that has pushed inflation to its current nosebleed levels. In other words, inflation may have indeed finally peaked (as discussed here), but with prices likely to remain sticky for quite a while, what comes next is a recession as what comes next is a very painful and volatile repricing of supply and demand at a time when prices can’t drop and when – absent another stimmy – US consumers have just tapped out.