Delta expects to regain profitability and inflation is hot

Stocks traded modestly higher despite 1980s-like annual inflation figures as investors look for a silver lining in declining monthly inflation. Bond traders give a vote of confidence to the Fed, betting that the Bank will accomplish its inflation fighting mission.

Reading from different scores.  If you are trying to figure out what the deal is with inflation and rates… well, good luck. The reason for my jocular opening line is because, in fact, there are so many opposing narratives on the matter and all of them are credible ones. Let’s start at the top. Yesterday, the Bureau of Labor Statistics released its Consumer Price Index, or CPI, and the number showed that the index grew by +7% since last December and by +0.5% from November through December. Wait, wait, I am on my Bloomberg looking at the historical numbers. I looked back 30 (that’s 1992) years and yesterday’s print is still the highest. Ok, how about 40 years (that’s 1982)?  Now I found it. It was the summer of 1982 when the annual inflation number was last at yesterday’s released level. Ronald Regan was in the second year of his first term as President and Paul Volcker was the Chairman of the Federal Reserve. That year marked the beginning of the end of a 10-year period of high inflation. Prior to that, you had to go back to post WWII and the Korean War to witness inflation like that. Oh, I forgot to mention that the Fed Funds rate in 1982 was around 15%. So, according to the CPI, we were paying quite a bit more for things in December than in the prior December… and annual growth like that hasn’t been with us… for a long time. The monthly growth figure, +0.5%, implies that inflation may be trending downward with November and October’s figures coming in at +0.8%, and +0.97%. So, that is one story. Inflation is big and perhaps, receding.

The Fed is telling another story. The Fed has held its dovish ground for quite some time, even as inflation began to tick higher in early 2021, sternly arguing that it was transitory, temporary, and that it would soon right itself. Finally, under intense pressure and in the wake of a late year spike, the Fed began to warm up to raising rates and ultimately ended the year pivoting to a hawkish stance. And the hawks are still hawking. WHILE YOU SLEPT, Philadelphia Fed President Patrick Harker said that he supports “at least three” rate hikes and would be amenable to starting in March. “At least” implied possibly 4… or more. According to pre-released comments from Fed Governor Lael Brainard who is going to begin her confirmation for Vice Chair today (10 AM EDT, in case you were wondering), she too, is committed to tackling inflation. Just how much this known dove is committed, we will surely find out at the hearing. Needless to say, the Fed has begun to withdraw accommodations and is preparing to shift over to rate hiking… real soon.

The final story comes from the markets. The Bond market has been under intense pressure since the Fed began to hint at a hawkish pivot. Well, maybe not too intense. Both shorter and longer maturity Treasury yields have risen since early October, but they both tell a slightly different tale. 2-year yields, which are closely tied to Fed policy have risen to 0.91% from 0.2%, while 10-year yields have gone from 1.48% to 1.74%. The 2-year yield increase happened in a straight line while the 10-year dipped along the way after plateauing, dipping once again, and then racing to a pandemic-era high last week.  What vexes most economists is that yields are not considerably higher despite all the Fed talk. Bond yields appear to be telling a story that rate hiking will be limited (perhaps 3 in the next two years, based on the 2-year note) and that long term inflation will be under control, based on the 10-year yields inability to break significantly higher. Stocks seem to be warming up to that narrative as well. Yesterday’s bigger than expected monthly rise in the CPI might have sent interest rate sensitive growth stocks lower yesterday, but they in fact, rallied.

So, bonds and maybe even stocks believe that the 3-ish expected rate hikes will get inflation under control. The CPI implies that annual inflation may look big, but the monthly numbers are trending down, so perhaps inflation has peaked. The Fed appears ready to toe the newly minted hawk line, and may be late to the party, though its tough talking may actually be working. All I know is that I am paying a lot more for gas, skinless boneless chicken breasts, and cucumbers these days… something’s gotta’ give.

MOVERS ‘N SHAKERS

AutoZone Inc (AZO) rose by +2.59% yesterday after Truist initiated coverage with a BUY recommendation and a $2329 12-month target.  The auto parts retailer has had an impressive 12-month return of +63%. Having just spent almost $2k to keep my beloved older Jeep running smoothly, that makes sense.  Potential average analyst target upside: +5.4%.

Quest Diagnostics (DGX) shares fell by -6.8% yesterday, topping the S&P500 loser board. The company forecast 2022 earnings below analysts’ prior estimates. Quest will release its Q4 earnings the first week of February. Dividend yield: 1.68%.  Potential average analyst target upside: +12.6%.

Delta Air Lines Inc (DAL) shares are higher by +2.19% in the pre-market after the airline announced that it expects to become profitable this year. It also announced they missed 4Q21 EPS estimates by -2.53% and Revenues by -0.46%. Potential average analyst target upside: +28.2%.

Qorvo Inc (QRVO) shares are lower by -1.60% in the pre-market after being downgraded to MARKET PERFORM, the equivalent to a HOLD rating by Oppenheimer. The analyst cited limited upside for near-term growth for the semiconductor manufacturer who receives some 30% of its revenues from Apple (AAPL). Potential average analyst target upside: +32.8%.

YESTERDAY’S MARKETS

Stocks took an optimistic stance in the wake of an eye-opening CPI number yesterday, implying that the Fed will not shock us and that it will be successful in its inflation battle. The S&P500 closed higher by +0.28%, the Dow Jones Industrial Average rose by +0.11%, the Nasdaq Composite Index climbed by +0.23%, the Russell 2000 Index slipped by -0.74%, and the S&P500 ESG Index gained +0.36%. Bonds fell and 10-year Treasury yields added +1 basis points to 1.74%.  Cryptos gained +3.96% and Bitcoin added +2.59%.

NXT UP

• Producer Price Index (Dec) is expected to have grown by +0.4%, down from the prior month’s +0.8% gain.
• Initial Jobless Claims (Jan 8) is expected to come in at 200k, down from last week’s 207k.
• Lael Brainard will be in front of the Senate Banking Committee for her Vice Chair nomination hearing. This can be a market mover as the committee will surely grill her on inflation and rate policy.