A Fantastic Inflation Report

Bitcoin breaks a key psychological level … gold is about to set a new high … small businesses are not optimistic about coming economic conditions … consumer spending weakens

It’s a busy news cycle. Let’s cover a handful of the top stories that are impacting your portfolio.

This morning, the Producer Price Index (PPI) showed inflation tumbling

While yesterday’s Consumer Price Index report was good overall but had a few weaker spots, this morning’s Producer Price Index was flat-out fantastic.

Here’s CNBC:

The March producer prices index, a measure of prices paid by companies and often a leading indicator of consumer inflation, declined by 0.5% month over month versus expectations for prices to be flat.

Excluding food and energy, the core wholesale prices reading shed 0.1% month over month, much better than the 0.2% increase expected by economists polled by Dow Jones.

This gives firepower to more dovish Fed members who are looking for a rate-hike pause to help prevent more economic damage.

The big question: Is it too late to prevent a recession?

Yesterday’s release of the March FOMC meeting minutes suggests it might be.

From the meeting summary:

Given [Fed staff members’] assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.

While that may be the case, for now, let’s enjoy the win with this morning’s great PPI report.

Meanwhile, Bitcoin topped $30,000 earlier this week and keeps climbing

As we’ve been tracking here in the Digest, Bitcoin and top altcoins have been enjoying a banner year so far.

Bitcoin has now climbed more than 80% in 2023, which has driven its price above the key psychological level of $30,000 for the first time since last June. It’s at $30,412 as I write Thursday early-afternoon.

Our crypto expert Luke Lango believes that while this recent, monster surge leave Bitcoin overextended in the short-term, the fundamentals are setting up for more gains.

Let’s jump to Luke’s latest update of Crypto Investor Network:

After some consolidation here over the next few weeks, we fully expect BTC – and the whole crypto market – to take its next big leg higher in this boom cycle. 

Among the fundamental tailwinds Luke references, perhaps the greatest is the “Halving Cycle.”

Back to Luke to explain:

Every four years, Bitcoin has a halving event. Going into and following these major halving events, cryptos do the exact same thing every time. 

First, they crash two years before the halving. 

Second, they rebound 12 months before the halving. 

Third, they melt-up to new highs after the halving…

As you can see in the chart below, this cycle has so far held true in 2022/23. Assuming the trend continues to hold, we are about to enter “the rebound” phase. We will enter the “the melt-up” phase in 2024. 

Source: Bloomberg

Overall, we remain very constructive on the outlook for cryptos in 2023 and 2024. 

By the way, Ethereum is also climbing today. In the wake of its Shanghai upgrade, it’s climbed more than 4% and is about to pierce $2,000 for the first time since last spring.

Meanwhile, gold appears poised to set a new all-time-high – possibly today

As I write Thursday, gold trades at $2,053, which is just a hair beneath its all-time-high of $2,069 set back in 2020.

We’ve pointed out here in the Digest that gold’s recent bullishness doesn’t make much sense on one hand. Inflation is dropping, the Fed is likely to continue increasing rates at least once more, and investors have all sorts of great options for safe, high-yielding fixed income. Such an environment isn’t a recipe for gold gains.

But as we’ve noted, gold has been climbing based on fears of a potential deflationary bust as the Fed’s interest rate hikes threaten to push the economy into a recession.

A moment ago, we noted how even the Fed itself now anticipates a “mild” recession later this year as the base case. This is why gold keeps climbing, and why a new all-time-high is easily within reach – possibly by the time you read this.

Speaking of deflationary bust fears, let’s now pivot to the National Federal of Independent Business (NFIB) survey from earlier this week

From Bloomberg:

More US small businesses reported having greater difficulty getting a loan in March after multiple bank failures led to a further tightening of credit conditions.

A net 9% of owners who borrow frequently said financing was harder to get compared to three months earlier, the most since December 2012, according to a survey from the National Federation of Independent Business out Tuesday.

The same share expects tougher credit conditions in the next three months, matching the highest level in a decade.

It turns out, the NFIB’s Small Business Optimism Index has been below its long-term average for 15 straight months.

Plus, only 20% of small businesses plan to invest in equipment in the next three-to-six months. That’s the smallest percentage in two years. Meanwhile, 15% anticipate weaker sales over the next quarter. That’s the most since last August.

These NFIB results are important to continue watching. If we see material improvement in small business optimism, it’s likely to support an S&P rally. That’s because as we pointed out in yesterday’s Digest , Wall Street always prices itself for what’s coming six-to-12 months down the road. So, if small businesses are growing optimistic, Wall Street bids up prices to reflect that optimism, even if current economic conditions aren’t great.

But for now, this lingering business pessimism could drag on the market. It shows us that small business owners remain fearful about what they see coming, so even forward-looking-Wall-Street can’t re-price for growth.

Finally, U.S. consumer spending weakens

Let’s jump to Bloomberg:

Spending on credit and debit cards rose at the smallest pace in more than two years, dragged down by slower wages, fewer tax refunds and the end of pandemic-era benefits, according to a report by Bank of America Institute.

After a strong start of the year, spending per household rose 0.1% from a year ago, the slowest pace since February 2021, Bank of America Institute said Wednesday. The weakness was broad-based across goods and services.

On the topic of credit card debt, Americans just notched a new, less-than-desired record.

From CBS News on Monday:

While carrying credit card debt is never advisable, now is a particularly tough time for consumers, with the average interest rate hitting a record high in the first quarter of 2023.

The average credit card interest rate is now 20.92%, which is higher than it’s been at any point since the Federal Reserve began tracking annual percentage rates (APRs) in 1994, according to a new study from WalletHub. 

For new credit card offers, the average interest rate in the first quarter hit 22.15%, up from 18.32% during the same period a year earlier, according to the study. 

This will grow consumers’ debt loads, making it even harder for them to pay off outstanding balances, even if they’re not adding to their existing debt. 

With consumer spending driving roughly 70% of our economy, a strained U.S shopper isn’t good news.

On that note, a new study from CNBC shows this financial strain is spreading.

From CNBC:

Inflation, economic instability and a lack of savings have an increasing number of Americans feeling financially stressed. 

Some 70% of Americans admit to being stressed about their personal finances these days and a majority — 52% — of U.S. adults said their financial stress has increased since before the Covid-19 pandemic began in March 2020…

The survey found most Americans (58%) are living paycheck to paycheck.

Struggling to make ends meet, many are relying on credit cards to cover any shortfalls. Meanwhile, nearly one-quarter of those surveyed said credit card debt also contributed to their financial stress. 

All eyes are on the Fed and its interest rate policy, which is behind much of this strain.

We’re three weeks away from the Fed’s May FOMC meeting. Most market observers are predicting a quarter-point hike. Investors will be scouring every word for clues about what will come in June and beyond.

We’ll keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg

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