☀️☕️ US Inflation d’oh! And yet…

📊 Also: And yet… S&P 500 new record high; Oracle enterprise + Nvidia AI; Japanese Inflation uptick 🎓 Crowded Trade

📈 Market Roundup [13-March-24]

US large-cap S&P 500 closed 1.12% UP ▲

Tech-heavy Nasdaq Composite closed 1.54% UP ▲

Pan European STOXX Europe 600 closed 1% UP ▲

HK/China's Hang Seng Index closed 3.05% UP ▲▲▲

Japan's broad TOPIX closed 0.36% DOWN 🔻

📝 Focus

  • US Inflation d’oh! And yet…

📊 In the Markets

  • And yet… S&P 500 new record high; Oracle enterprise + Nvidia AI; Japanese Inflation uptick

📖 MoneyFitt Explains

  • 🎓 Crowded Trade

💸 Personal Finance Corner

📝 Focus

US Inflation d’oh! (And yet…)

Price pressures in the world’s largest economy are not cooling as quickly as Wall Street’s highly-paid analysts have been expecting. US inflation unexpectedly rose to 3.2% year on year last month when it had been expected to remain steady at 3.1%. Core inflation, excluding food and energy costs, stood at 3.8%, slightly lower than January's 3.9% but not as low as the 3.7% economists were forecasting.

Solid increases in consumer prices, particularly in gasoline, shelter and services like motor insurance and health, suggest persistent inflation and come as something of a setback for the Federal Reserve in its fight to bring inflation down to its 2% target. Of course, this is just data from one month, and longer-term trends can be obscured by “noisy” data, and the current crop of Fed officials, including Chair Jerome Powell, have consistently signalled a cautious approach to lowering borrowing costs.

But in January, US inflation also eased less than expected to 3.1% vs expectations of 2.9%. Down from 3.4% in December and well off its pandemic-era peak of 9.1% in June 2022, but it was enough to trigger a sharp selloff in the markets, with the S&P 500 down 1.4% that day and the Nasdaq off 1.8%. So that’s two months of misses, but this time, for the February print, the S&P 500 powered ahead to a new closing high. This is starting to look like the market is pricing in that there is basically no risk that persistent inflation (hence higher-for-longer rates from the Fed) could turn a soft landing scenario into a hard landing or, worse, stagflation. Sentiment is clearly bullish, but is buying on every piece of news -good or bad- a “crowded trade”🎓?

As economist (and superb investor) John Maynard Keynes said in the 1930s: “Markets can stay irrational longer than you can stay solvent.” - Image credit: Public Domain via Wikimedia

📊 In the Markets

Stocks surged on Tuesday, with the S&P 500 hitting a record-high close. 

Despite a surprisingly high 0.4% increase in the Consumer Price Index for February (above), investors remained bullish about the interest rate outlook, suggesting that they are growing less concerned about the timing of rate cuts and more focused on the prospect of a soft landing. 

Gold prices fell 1.18% to $2,156.86 per ounce, down from Friday's record high and breaking a nine-day winning streak. A lower interest rate is positive for gold prices as it reduces the opportunity cost of holding the precious metal since it pays no interest.

Oracle soared on upbeat quarterly results and, especially, news of a collaboration with Nvidia. The enterprise (and cloud) software giant rose 11.7% while Nvidia gained 7.2%, boosting the semiconductor index by 2.1% to a new high. 

Enterprise Software - a mini-explainer

Enterprise software refers to specialised computer programs designed specifically for large organisations. These applications help manage critical business tasks like finances, employee management and customer interactions. 

Unlike software for individuals, enterprise solutions aren’t available “off the shelf” as they target the unique needs of big companies.

These solutions are increasingly delivered via cloud infrastructure, driven by its scalability, flexibility and cost-effectiveness, with more large companies planning to migrate from legacy enterprise software to cloud-based tools. 

Hong Kong's Hang Seng index surged over 3%, leading gains in Asia and extended its winning streak to three days, while mainland China's CSI 300 climbed 0.23%. [MFM: “Uninvestable” China? from early February]

Japan's corporate goods price index inflation rate for February came in at 0.6%, above the 0.5% expected by Tokyo’s Finest, and up from January's 0.2%. 

The CGPI measures inflation from the perspective of manufacturers within Japan, i.e. reflecting changes in prices that companies charge each other for goods and services. (It’s similar to the producer price index, which also tracks inflation but focuses on the prices received by producers like manufacturers and farmers for their output.)

A robust CGPI inflation reading could prompt the Bank of Japan to raise rates soon, potentially impacting Japan's equity markets. The broad Topix index in Japan fell 0.36%, a larger decline than the export-focused Nikkei 225 benchmark.

Land of the rising interest rate (but when?) - Image credit: Tenor

📖 MoneyFitt Explains

🎓️ Crowded Trade 

Actually, this is exactly what it sounds like. A trading position is said to become "crowded" when held by many investors, who feel so convinced of the logic of the position that they may over-commit and become complacent. 

Crowded trades are dangerous because it doesn't take much to send everyone piling out of the trade at the same time with nobody on the other side.

While often based in fundamentals, they are typically also driven by herd behaviour and the fear of missing out (FOMO), leading to a "wall of money" getting into the trade, which can be either "long" (bullish) or "short" (bearish), leading to over (or under) valuation which can persist for a long time or get worse. (This can make it dangerous for contrarian investors to take the other side to catch the eventual sharp correction.)

Often, this can lead to positions that are built on leverage and far exceed benchmark weightings, and the biases built into such positions can be shown in high correlations to other positions in an investor's portfolio (e.g. if the crowded trade is to be long the US Dollar, it could also appear elsewhere in the portfolio as an underweight in Emerging Market equities.)

As the father of value investing and Warren Buffet's mentor Benjamin Graham said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

💸 Personal Finance Corner

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