VIDEO: What CPI Means for the Fed Wednesday (original) (raw)

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In today's Action Alerts PLUS Daily Rundown, Chris Versace breaks down what this morning's CPI report means for Wednesday's Fed decision.

He also takes a look at AAP holding Marvell Technology (MRVL) and AAP Bullpen member Portillo's (PTLO) .

CHRIS VERSACE: Good morning, Action Alerts PLUS members. And Happy Tuesday, or, as I see it one, day before the Fed concludes its June monetary policy meeting. And we have our June members-only call. With that as a set up, let's dive into it this morning with a look at this morning's Consumer Price Index report.

Headline CPI for May came in at 4.0%, down big from 4.9% in April and better than the consensus expectation for a reading of 4.1%. Now, simply put, the headline figure points to good progress on the inflation fight, but we also have to recognize that the vast majority of the sequential drop in May was due to the fall in energy prices. And yes, we are noticing that gas prices have started to tick higher in June versus May, and that could mean that, despite the progress we saw in May, again, with the headline CPI data, we may see a slower path to the Fed's 2% target being had in the coming months.

Now, as we know, the real focus by the market for us and, of course, the Fed is on the core CPI data, which came in, as expected, at 5.3% year-over-year in May. So what's the context for this? Well, it is the lowest reading on hand since November of 2021. And yes, it does break the 5.5% to 5.7% range that the core CPI data has been trapped in for the first four months of 2023.

However, it's still quite a distance from the Fed's 2% target. However, the market, when we look at the CME FedWatch Tool, is seeing this as indicating the Fed will, indeed, skip a beat at the June policy meeting. Again, that concludes tomorrow.

That tool shows something like a 95% probability that the Fed will, again, do nothing. And that's up from 75% before we got the data earlier today. As we see it, today's data, along with the downtick in average hourly earnings seen in the May employment report, are going to cause the Fed to, indeed, pause tomorrow.

However, we expect the Fed will remind the market that it will be diligent, data-dependent, and, as of now, no rate cuts are on the table for 2023. Let's shift gears a little bit. Last night, we had earnings from Oracle. And while it's not a name in the portfolio, the report and what the company had to say gives us some solid clues on the state of not only AI, but also cloud.

And those clues-- excuse me-- point to strong end-market performance for Oracle. And by that, I mean its cloud and infrastructure businesses were up more than 50% year-over-year on a constant currency basis. Moreover, Oracle sees the strength in cloud continuing.

From our perspective with the portfolio, those are very, very positive comments for our position in Marvell, a company that focuses on digital infrastructure, end markets, and benefits-- in particular, from the cloud, but other areas as well. However, when it comes to Marvell, as we've shared with you, the shares have simply been on a strong tear over the last few weeks, and we would look to revisit Marvell shares at lower levels, below 55, preferably closer to 50, if we get there.

Now, in yesterday's morning alert, I mentioned we were giving recent bullpen additions Portillo's-- PTLO-- a closer look. And yes, there are a few reasons behind that. Like many restaurant stocks, a key aspect to the story is geographic expansion.

We've seen this with Dunkin, Starbucks, Habit Burger, Dutch Bros., and numerous others. With Portillo's it is serving up measured footprint expansion into states that are benefiting from population growth. And most importantly, it's doing so leveraging its own operating cash flow, not borrowing to do so.

Second, as we talked about yesterday, credit card debt continues to rise. And that's approaching around a trillion dollars, roughly $5,700 on average per person. We're also considering what happens when student debt relief goes by the wayside and what that might mean for consumer spending as well.

From our perspective, the consumer is likely to be more selective, and that plays right into Portillo's' offering, which has an average ticket size of around $10. Compared to others that have far-higher average ticket sizes, this should allow Portillo's to pick up consumer wallet share as it continues to expand its footprint. Now, we've got some more work to do on PTLO's shares, including some valuation work, and we do want to revisit the technicals.

But again, we wanted to share with you that we are warming up to the shares. And with that, I'll leave you with a final reminder that our next AAP call will be live tomorrow at 12:00 PM Eastern time. We'll be going through every name in the portfolio, and that is something you won't want to miss.

Thanks for watching. Have a great day.

At the time of publication, **Action Alerts PLUS**was long MRVL.