This JPMorgan pro says the Fed has it backward - rates need to be cut to lower inflation

By Barbara Kollmeyer

Critical information for the U.S. trading day

It's been a long, dry run for the S&P 500 SPX lately.

That is, looking through the at-the-high lens. As Jim Reid and other strategists at Deutsche Bank point out, the S&P 500 hasn't seen a new ATH in seven straight sessions, the longest such stretch since January when it topped the peak of 2022.

That dearth of highs may keep rolling on, after CPI data came in hotter-than-forecast, roiling stock futures.

Economists have warned that one more strong reading might put the kibosh on hopes for a June rate cut from the Fed. Recent strong payrolls data has impressed upon some observers that the Fed has one less reason to rush into a rate cut.

Read: Will inflation ever go down? That's what frustrated Americans are asking ahead of March CPI.

Onto our call of the day from Jack Manley, global market strategist at J.P. Morgan Asset Management, who says the Fed has this all wrong, and is making things far worse as it data watches for clues on when to move.

"A lot of what's going on today can be very closely linked to the level of interest rates. You slice and dice inflation, whether you're looking at the headline number, the core number, you're removing the goods equation," Manley said in a Bloomberg interview on Tuesday.

"It's shelter on the headline side of things, it's automobile insurance on the core services side of things. Both of these things are going to be direct reflections of the interest rate environment," said Manley.

"I think we're in this funny, peculiar chicken-and-the-egg type situation where you're not going to see meaningful downward pressure on inflation until you see meaningful downward pressure on shelter costs. And you're not going to see meaningful downward pressure on shelter costs, until the Fed lowers interest rates," he said.

Manley's boss, JPMorgan CEO Jamie Dimon, earlier this week warned shareholders that U.S. interest rates could surge to 8% or due to a laundry list of inflationary pressures, such as "ongoing fiscal spending."

Read: Stocks traders should watch 10-year more than CPI itself, says Mike Wilson

While investors will have to endure another set of inflation numbers on Thursday, via PPI, relief from data is on the way as earnings season begins Friday.

And: Why haven't rising bond yields hammered stocks? Here's what analysts say.

The markets

The Dow DJIA has dropped over 400 points, as major indexes SPX COMP sink following CPI data, with Treasury yields BX:TMUBMUSD02 YBX:TMUBMUSD10Y jumping, and gold (GC00) and the dollar DXY under pressure.

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The buzz

March CPI rose a higher-than-forecast 0.4%, versus 0.3% expected, and on an annual basis, reached its highest since September at 3.5% from 3.2%. Core CPI rose 0.4%, also beating expectations for a rise of 0.3%. Prices were fueled by gas and housing.

Earlier, data showed weekly mortgage rates rose more than 7%, hitting the highest level in a month.

Wholesale inventories are due at 10 a.m, with the minutes of the Fed March FOMC meeting and the federal budget at 2 p.m. Fed. Gov. Michelle Bowman will speak at 8:45 a.m., followed by Chicago Fed Pres. Austan Goolsbee at 12:45 a.m.

Read: 4 things Wall Street will watch for when the Fed releases minutes of March meeting

Ahead of the big banks on Friday, Delta Air Lines (DAL) shares are headed for a three-year high after the airline reiterated 2024 guidance and reported record revenue for the March quarter.

Chip maker TSMC (TSM) reported first-quarter revenues rising by the most since 2022, thanks to AI-driven demand. U.S.-listed shares are up.

Fitch Ratings downgraded its China's long-term foreign debt rating to negative from stable amid concerns over widening deficits and economic worries.

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   TSM     Taiwan Semiconductor Manufacturing 
   GME     GameStop 
   NIO     Nio 
   AAPL    Apple 
   AMC     AMC Entertainment 
   AMZN    Amazon.com 
   DJT     Trump Media & Technology 
   AMD     Advanced Micro Devices 

The chart

Corporate profits, supported by "healthy economic growth," will be the biggest driver of equity returns, says a team of Goldman Sachs strategists led by Jenny Ma. And the companies best positioned to benefit will be those with high operating leverage, as they can generate more sales without costs rising, meaning margins expand and earnings can grow faster. Their chart shows how returns for both high and low operating leverage groups track sales growth expectations for the S&P 500. As it shows, the higher leveraged group is tipped for a stronger performance:

High operating leverage stocks are also trading a near record valuation discount to their lower-leverage rivals, the strategists note. Paramount (PARA), Hasbro (HAS), Etsy (ETSY), Marathon Oil (MRO) and Boeing (BA) are recent additions to Goldman's high-operating leverage basket of stocks.

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-Barbara Kollmeyer

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04-10-24 1012ET

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