Stocks had a mixed close yesterday as traders toiled with yesterday’s varied Consumer Price Index / CPI release. Bond yields eased a bit giving traders enough breathing room to consider chipmaker ARM’s long-awaited, mega IPO.
Oily. I am going to start with the headline this morning. Inflation accelerated last month. Take a look at the following chart, then keep reading for a description.
This chart 🙃 above shows the breakdown of annual inflation from 2020 through current. You can see how inflation rose quickly starting in the first quarter of 2021, sounding alarm bells. By the end of 2021, you can see how inflation became widespread with rises in services (blue), food (gold), goods (orange), and energy (green). You can see how the solid white line, which is headline CPI, crossed over the dash white line which is “core” inflation (not including food and energy). That cross over tells the high-level story in a nutshell; that story is “food and energy propelled inflation higher.” On the chart, you can see how inflation peaked in June of 2022 when energy was at its highest. At that point, the Fed was already mobilized and raising rates in 1980s fashion. You can see that the 2nd half of 2022 saw energy inflation recede significantly, and by earlier this year go negative. That’s right, energy first disinflated, then it deflated. You can see how the green bars were below 0, as they were for much of 2020 and the start of 2021. You may also note that the solid white line crossed back below the dashed line for the first time since March 2021. Food (orange bars) was slowly decelerating and energy, as aforementioned, was negative. Now, pay attention ⚠. You can see how the green bars hit their low point in June and have slowly gotten smaller heading back to 0 and trending toward positive. That means energy prices are getting higher. You know this because 1) I have told you that OPEC has been aggressively cutting production (in order to cause prices to go higher) and 2) because I told you that my mother-in-law told me that gas prices have been going up. I will skip the chart of gas prices and just tell you that the national average for per gallon went up from $3.20 in January of this year to $3.85. That doesn’t seem like much when you look at it that way, but when you consider that the price increase was +20%, you start to realize that you are spending +20% more on that portion of your budget, and that is not trivial. Now, I am going to show you the CPI chart on a month over month basis. Take a look at it and then follow me to the conclusion.
On this monthly chart 🙃 you can see quite clearly how energy (the green bar) went from being negative or mildly positive to VERY POSITIVE. Positive on the scale of late 2021 through June of 2022. So, here lies the dilemma. Energy prices are going up because OPEC has cut supply and demand is strong (globally). This would be ok under normal circumstances, but when inflation is as high as it is, it is alarming. On a positive note, you can see that monthly increases of food (gold bars) and goods (orange bars) have receded considerably since last year. Meanwhile, services (blue bars), while still elevated, are not accelerating. The net result is that core inflation, which is what the Fed watches most closely, has decelerated, but headline inflation which is what you, me, AND MY MOTHER-IN-LAW watch most closely has accelerated. The markets’ reaction to yesterday’s release was somewhat positive because a slowing core number means that the Fed is less likely to raise rates any further… for now. I say for now because I have to remind you that food, goods, and services all rely on energy to survive. Airplanes need fuel to fly (blue bars) while Samsung and JM Smucker rely on diesel fuel to deliver your flat panel TV and jar of strawberry jam (orange and gold bars) to your local store. At some point, those producers may be forced to raise prices to cover the increased delivery costs. Hopefully not! Check out this morning’s release of Producer Price Index / PPI for some clues on that.
WHAT’S HAPPENING BEFORE THE BELL
Etsy Inc (ETSY) shares are higher by +3.78% after Wolfe upgraded the stock to a STRONG BUY and raised its price target, meanwhile Guggenheim lowered its price target while maintaining its BUY rating. Potential average analyst target upside: +68.7%.
Carnival Corp (CCL) shares are higher by +1.86% in the premarket after Redburn Atlantic raised its rating to BUY from NEUTRAL, citing favorable growth prospects and increased margins. Redburn also raised Norwegian Cruise Line, up by +2.14% in the premarketto a BUY. Potential average analyst target upside: +26.0%.
- Retail Sales (August) may have grown by +0.1% after climbing by +0.7% in July.
- Initial Jobless Claims (Sept 9) is expected to come in at 225k, higher than last week’s 216k claims.
- Producer Price Index / PPI YoY (August) is expected to have increased by +1.3% after rising by +0.8% in July.
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