Here's why the cooler consumer inflation we wanted flipped the stock market on its head

Published Thu, Jul 11 20243:20 PM EDT

We finally got the consumer price index we were looking for, with both the June headline and core readings coming in slightly lower than expectations. The CPI bolstered the case for the Federal Reserve to start cutting interest rates. It also gave investors the green light to rotate out of this year's tech winners and into rate-sensitive stocks. Headline CPI dipped 0.1% from May, the first monthly decline since May 2020. On a year-over-year basis, it rose 3%, which was the lowest level in more than three years. The core rate, which excludes food and energy prices and tends to be more heavily considered by the Fed, rose just 0.1% from May. It increased 3.3% from a year ago, the smallest gain since April 2021. Thursday's data from the government represents the continuation of a downward trend in both inflation measures. Jim Cramer called the CPI data "perfect," in his analysis on CNBC shortly after the release. He said the cooler data paved the way for lower rates but was not so weak as to spark concerns about deflation or prompt the Fed to rush into things. Sure, there was a marginal uptick in the likelihood of a cut at the Fed's upcoming July meeting, according to the CME FedWatch tool . But the market still placed the highest odds on the first cut since the rate pause to be in September, with subsequent cuts starting to come into view in November and December. In other words, we're right back to the market expecting as many as three cuts by the end of the year. After its June meeting, the Fed was projecting only one cut this year. Of course, we'll have to see what the data tells us in the coming months to see where central bankers actually land. Investors will be looking for more clues Friday morning when the June producer price index is released. PPI is a measure of wholesale inflation. All this Fed talk boosted a number of our rate-sensitive stocks, including solar name Nextracker , toolmaker Stanley Black & Decker , and electronics retailer Best Buy . During the Club's Morning Meeting on Thursday, Jim said that members need to understand that we have a diversified portfolio exactly for days like this. Every stock can't go up at once; nor should they. It's no wonder that our tech stocks were getting killed on Thursday. That's why, as Jim explained, this late in the cycle we brought in some stocks that could benefit when interest rates dropped. As we keep playing the Fed guessing game, Thursday's consumer inflation report clears the way for earnings season and allows for the results and management commentary to drive the stock action. Price will be first and foremost on investors' minds. Jim said he thinks the Fed should stick to its guns and cut only once before the end of the year because companies have been reluctant to lower their prices; other than Walmart and Club name Costco . Jim talked about how PepsiCo 's reluctance to reduce prices led to mixed quarterly results and narrowed full-year revenue guidance. That's reflected in the food and beverage component for the CPI, which saw monthly increases in May of 0.1% and June of 0.2% after a flat April. We've also been watching shelter costs like a hawk because they have been a sticky source of inflation that represents a large, unavoidable cost for U.S. consumers. On a monthly basis, shelter advanced 0.2% in June, not great since it means prices are still rising, but welcome news considering the back-to-back 0.4% gains in April and May. June shelter costs year-over-year increased 5.2%, which was a continuation of the downtrend seen since March 2023. Bottom line Many investors might have expected a rip-your-face-off the stock market rally on Thursday's CPI news — after all, it's exactly the kind of report we've been waiting for. Bond yields were also lower, which tends to support stocks, especially tech stocks. However, the urge to take profits and buy some cheaper rate beneficiaries was too great. The Nasdaq , which was coming off six straight record highs, dropped nearly 2% on the session. .IXIC YTD mountain Nasdaq YTD While we're seeing a rotation out of the names that can grow in any rate environment to those that are far more sensitive to borrowing costs and the economy, seven of the 11 S & P 500 sectors were still higher, with real estate leading the way Thursday. There were more winners than losers on the session, but the sheer size of information technology and communication services, which combined account for over 40% of the S & P 500 index, were masking the strength seen elsewhere . 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An Aldi supermarket in Alhambra, California, US, on Thursday, June 27, 2024.

Eric Thayer | Bloomberg | Getty Images