What's Behind CPI's Cooldown & IBM Poses Big Question to Software

[00:00:00] Kevin Hanks: Here to help us set up the trading day is Kevin Hanks, live from the CBOE for our PreVal Playbook. I will say, Kevin, I will let you get to CPI. I didn't want to step on the headline here because this is arguably one of the biggest pieces of news we've gotten this morning coming in. I mean, right now, relatively light for the month of June as far as inflation data is concerned. So walk us through your thoughts here. [00:00:23] Speaker 2: Good morning, Jen. I you know, if you've been watching the Schwab Network, we've been talking for days about this CPI data and the fact that energy crude oil futures during the month of June were down 23 percent. Well, it showed up in the CPI data. That was the good news from the headline perspective. But we'll talk about core in a moment. But first, the numbers headline month over month, CPI comes in down point four. That is much better than the last month of up point five, much better than the down a tenth that was expected year over year goes from four point two percent to three point five percent. That's seven tenths lower than last month and three tenths lower than consensus. Now, here's the good news, Jen. Even the core came down. Remember, that number dominated by energy on the headline is going to be and I'll get to those numbers in a moment. But the core number coming in unchanged month over month and two point six percent year over year on the core CPI. That is something that Kevin Warsh is going to be able to talk about in an hour or so when he speaks before the set the House Financial Services. Now, let's break down the number because it's significant. And of course, it's dominated by energy, energy overall, down five point seven percent energy commodities down nine point five percent gasoline down nine point seven percent and fuel oil down nine point two percent. That's the dominant part of the headline number. Now, food was up point two, which is food away from home was up point two, food at home up point two. What other things jumped out at me? Shelter only up a tenth of a percent. That's more in the core number. Owner's equivalent rent up point two and overall rent up point one. So that's really good numbers out of rent. This is what is easing fears. That's why the dollar broke to the downside. That's why 10 year yields broke to the downside. Now, the concern coming off this really good CPI number, Jen, is the crude oil futures have rallied back the last two days. And and the energy that is so dependent on crude oil futures, it could be a short term. Right that those crude oil futures have to get back down to keep these inflation numbers. The good news is the core was a big beat as well, Jen. [00:03:08] Kevin Hanks: OK, I think so many good points made. And as always, I do think there's so many interesting numbers specifically within each of the seven monthly prints that I think is such a good breakdown to analyze, you know, what was still elevated and what contracted a bit. But we also did see Kevin Warsh reiterating his views on monetary policy. Do you think that with that coupled with, of course, the today's CPI report, does this not now necessarily strengthen the case for the Fed to cut rates this year? Is there still enough inflation risk to keep policy perhaps a bit more cautious? [00:03:38] Speaker 2: You know, I think we have a lot of Fed speakers. We've had a couple already this week that we're talking about the next move in interest rates being higher. This changes all that. In my opinion, it changes that because inflation is not as concerning as it was. And so I think there's still going to be a lot of Fed speakers today, a lot of Fed speakers this week. They're going to have to deal with a whole new set of data points. Remember, Christopher Waller, one of the Fed governors, said yesterday, talking about rates, that comment that he made may not age well with the core inflation that came crashing down. So I think that overall, the picture that we're going to get, you know, Kevin Warsh is going to talk today for the next two days in front of Congress. Today, he'll speak to the House Financial Services Committee. Tomorrow, he'll speak for the Senate Banking and Jen, here's the game that we can play. Here's the drinking game for Kevin Warsh's testimony. How many times is he going to say the word task force? How many times is he going to answer a politician's question with, well, we have a task force. We have a task force looking into that, and so I think you're going to hear a lot of the word task force in the next two days out of Kevin Warsh's comments. [00:04:55] Kevin Hanks: I could not agree more. I love this Kevin Warsh drinking game, and I so wish we could play Kevin, because I even have my own to add to it. Every time he basically rejects and says we're no longer answering about forward expectations, I also feel like you could add that to the drinking game and we'd have a good time. But nonetheless, to shift into, of course, energy. You mentioned energy, how could you not naturally tying into inflation into CPI? But as far as tensions escalating right now that we see between the U.S. and Iran and reports of this naval blockade that could be resumed, I mean, how seriously should we be taking this risk? And I mean, I know that it's difficult to gauge because it's already been a bit of a longer impact. And obviously that has major supply chain implications, but is this something that markets should be taking a bit more seriously, you think? [00:05:40] Speaker 2: Well, I think $80 crude oil is something that will catch the attention of the markets. Now, President Trump talking about a 20% surcharge as they open up the Strait of Hormuz, I think from a trading perspective, that's more rhetoric than actual action. I think that's a call to arms to allies of the U.S. and people that need oil from the Strait of Hormuz to help solidify ships' ability to come through the Strait of Hormuz. come through the Strait of Hormuz. Do I think the U.S. will ever impose a 20% surcharge on boats coming through the Strait of Hormuz? No, I don't. But I think the rhetoric gets high and then the negotiations start behind the scenes. So I'm going to watch this. But the rhetoric right now, Jen, we have to trade what's in front of us. And the rhetoric right now is heated, Jen. [00:06:35] Kevin Hanks: It is. I mean, and you know what else is looking, I mean, a bit heated, no pun intended, of course, tied to energy. But it's some of the reactions right now that we are seeing to IBM under pressure after releasing its preliminary report. And I know that so many people want to tie this naturally to, like, broader trends, broader concerns for enterprise technology spend. But, I mean, what really went wrong within some of these preliminary numbers? Because we are down now about 21.5% this morning. And this is not, I mean, like, a super high beta, super volatile name. This is a legacy company, IBM. I mean, it's just a floundering move this morning here at Pre-MarketCap. [00:07:13] Speaker 2: Two key points here on IBM pre-announcing their earnings. One thing they said was that numerous large-scale deals failed to close within the expected timelines. That's one thing, which the next question is, well, are they going to close, right? You want to know that. Their CEO also said that in the quarter, clients reprioritized their budgets. Capital previously meant for software was redirected towards purchasing servers and storage. Now, Jen, here's the massive question that traders are going to have to answer today. Is this an IBM-centric problem or is this a problem for all of software? You've got Microsoft down about $12 pre-market because they're going to hit software stocks on this news. The question that people are going to have to ask today, is this IBM's problem alone or is this more software issues? That's the big question for today with IBM. IBM, they're going to hit hard because these are bad numbers. But the question is, is it all of software that's under pressure, Jen? [00:08:20] Kevin Hanks: I know, and don't you think right now, given actually, like, I know that it feels ironic to say this because of the fact that IBM's obviously seeing a sell-off substantially so this morning. But, I mean, isn't it too, we're so quick to want to make such, like, broad-sweeping accusations based on one earnings. It's not the first time we've seen a company sell off in one single session. I mean, think, like, Supermicro has had days like this. IBM, obviously, Broadcom is also, as well as the companies like Oracle. But we've actually seen overall a pretty theme of resiliency amongst a lot of these software companies that have made a decent comeback in the more summer and spring months of this year. Wouldn't you agree? [00:09:00] Speaker 2: There's been, you know, the software sector has had a good couple days here, a good run. They're all going to be down this morning. But I would expect one of two things to happen. Either the whole sector to be down and sold off today or some individual names come out and say, "Hey, we're not seeing the same problems that IBM is seeing." And reassure investors that they're, you know, there's a baby in the bathwater question about this, right? Do you sell the whole sector because of IBM's pre-announcement? I would expect, if some companies don't see this, that they would come out and say that. Because they're going to get sold off until they do. The whole sector is going to be under pressure today. I want to hear someone like Microsoft, which, you know, let's face it, look at the chart of Microsoft. It's already sold off substantially. I would expect them to come out and say, "The problems with IBM are just IBM and not us." If we see that, you could see a bounce in some of these names. But IBM, going to have an ugly day, Jen. [00:10:04] Kevin Hanks: Yeah, I mean, basing for an ugly day. And obviously, we'll watch to see where things open here. We're obviously still in pre-market, but it's not looking promising as it stands right now. Obviously, we can always recover. But let's get to banks here. I mean, the major banks have reported a theme so far of strong profits and really strong investment banking revenues, I mean, across so many of these companies, like B of A, J.P. Morgan, Citi, as well as Wells Fargo. And so, what stuck out to you right now so far across the big banks that we've already heard from? [00:10:33] Speaker 2: Well, number one, the companies doing the best in earnings are the companies that were involved in the IPOs, the companies that were heavy trading, right, and net interest margin. All these figures, the banks had an incredible quarter. The problem why some of them aren't rallying off their earnings because they all had spectacular earnings is because, number one, the banks have run a long way, right? Goldman, I think, is still up pre-market because if it's trading, if it's IPOs, that's their bread and butter. So they did exceptionally well. So other stocks like J.P. Morgan, it had had a really good run into this earnings event. So the expected move was like $10, $10.50 either way. Last time I looked, it was trading right near 325. Hold on, I'll put it up to make sure and confirm. It was trading right near 325, which was the expected move on the downside. Yeah, it's trading just a little higher than that now, up to about 328. So that's in line or inside the expected move based on the options implied volatility, Jen. So these aren't terribly surprising numbers. But stocks that have rallied so far, the bar was extremely high for these names. And so some of them may consolidate or trade a little lower today. But looking at Goldman Sachs that came out with spectacular numbers, they're up $40 pre-market. So this is going to be, you know, we basically had five names come out with earnings today. And you're going to get a mixed message based on what they do and what they're, you know. J.P. Morgan is a massive bank that does basically everything. But a lot of it, the stocks have had great runs up to now. But Goldman is going to have a good day because what was strong about these banking earnings is their bread and butter, Jen. [00:12:31] Kevin Hanks: It's true. And I mean, looking further than space, as it seems like anything tied to, of course, that major, major IPO is seeing some success this quarter because of it. And it makes sense given, of course, how massive that valuation has been. But we will leave it there. So appreciate it, Kevin Hanks, for helping us break down, of course, some of the key moving stories this morning, moving the overall markets. [00:12:52] Speaker ?: Thank you.