Rising Oil Prices Could Threaten Positive Inflation Outlook

Potential Market Movers

The Consumer Price Index (CPI) is due out tomorrow before the market open and current forecasts project the CPI pulled back a little in August. However, year-over-year inflation growth is still expected to be above 8%. On Wednesday, the Producer Price Index (PPI), which measures inflation on the wholesale level, will be released and projections for that number also anticipate an August drop.

Rising equity futures suggest that investors are feeling confident that this week’s reports will demonstrate some slowing in inflation. However, the Cboe Market Volatility Index (VIX) was still slightly higher ahead of the opening bell reflecting at least a little doubt.

This is the last major inflation data before the Federal Open Market Committee (FOMC) meeting next week. Chances are there won’t be enough in these reports to change the Fed’s mind on a 75-basis-point hike. So, investors may already be looking past this report and on to the next one.

On Thursday, the latest retail sales report comes out which could be a market mover as investors start looking forward the next earnings season in October. Investors are hoping for signs that the consumer remains strong and that retailer inventory problems are behind them.

Stocks, particularly mega-cap and multinational, may get some help from a weaker U.S. dollar. The U.S. Dollar Index ($DXY) was down 0.76% ahead of the stock market open. The weaker dollar may suggest that the currency investors are also expecting a softening in the inflation numbers that could allow the Fed to slow its aggressive rate hiking in the November and December meetings.

However, the weaker dollar may be helping oil prices to rise as WTI crude oil futures were up 1.68% in premarket action. If oil futures are able to sustain this move, it puts them back above their November 2021 highs that were expected to be an important technical level and puts the futures contract on a three-day win streak.

Last month’s CPI report was softer than expected largely because of falling oil and gasoline prices. A resurgence in oil prices could put a damper on inflation expectations even if the CPI reports good news.

A couple of stocks moving this morning include Bristol-Myers Squibb (BMY) which jumped more than 7% on the approval of its psoriasis drug by the Food and Drug Administration (FDA). Carvana (CVNA) was up 6% after an analyst from Piper Sandler upgraded the stock to Overweight from Neutral.

Oracle (ORCL) is scheduled to report earnings after the market close.

Reviewing the Market Minutes

The stock market used a three-day winning streak to break out of a three-week losing streak. The S&P 500® Index (SPX) rose 1.53% on Friday to close the week 3.4% higher. The rally was fairly broad with NYSE advancers outpacing decliners nearly 6-to-1 and each sector finished the day higher.  

However, trading volumes were a little on the light side, which could make Friday’s rally a bit suspect for some investors.

The other major indexes also rallied with the Nasdaq ($COMP) climbing 2.11% and the Dow Jones Industrial Average ($DJI) rising 1.19%. Small-cap stocks pushed higher, helping the Russell 2000 (RUT) to pop 1.95%, outperforming the CRSP U.S. Mega-Cap Index that rose 1.58% and the S&P 400 mid-cap index that finished up 1.78%.

The S&P 500 found help with the nation’s largest grocer Kroger (KR) rocketing 7.4% on a better-than-expected earnings report and outlook. Dish Network (DISH) also boosted the benchmark index by shooting 8.6% higher on news of insider buying.

Investors appeared to be selling Treasuries because the 2-year Treasury yield rose eight basis points to 3.57% and the 10-year Treasury yield (TNX) increased three basis points to 3.32%. However, the moves in yields could be a result of a slew of new corporate bond issues that came out this week from blue chip companies like Walmart WMT Home Depot HD, and McDonald’s MCD.

Corporate bonds tend to have higher yields than Treasuries, which may have pulled investment dollars away from Treasuries. 

CHART OF THE DAY: The S&P Food & Beverage Select Industry Index ($SPSIFB—candlesticks) has moved nearly in-line with the Consumer Staples Select Sector Index ($IXR—pink) over the last 12 months. Both indexes have outperformed the S&P 500 (SPX—blue) over the same time period. However, the food and beverage index shows weakness against the S&P 500 in relative strength (green) by creating a price divergence. Data Sources: ICE, S&P Dow Jones Indices. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

CONSUMER REPORT: The Bank of America Institute released its Consumer Checkpoint report on Friday that revealed consumption remains “fairly robust” despite a 16% year-over-year (YOY) jump in utility bills and a 9.7% YOY increase in childcare. Consumers also spent 4% less for back-to-school shopping from July 15-August 30.

Bank of America (BAC) saw a 13% increase in total payments among credit cards, debit cards, Automated Clearing House (ACH), bill pay, person-to-person, cash, and check. Card spending is up 5% YOY but was down 5.3% in July. However, when adjusted for inflation, “real” spending appears to be down.

Additionally, more women may be moving back into the workforce after leaving during the pandemic because childcare spending is nearly back to pre-pandemic levels.

FOOD FIGHT: A new study from YorkTest last Wednesday found that if the current rates of inflation on grocery items continue, the weekly shopping spend of $227 could grow to more than $300 by the end of 2024, and $656.47 by 2030.

The largest percentage increases YOY have been in butter (+26.4%), flour (+22.7%), honey (+21%), cooking oil (+20.8%), and coffee (+20.3%). However, price increases for spirits don’t look so bad with beer and wine up between 2% and 4%.

HIGH PRICES: According to Yardeni Research, the consumer staples sector had a combined 12-month forward price-to-earnings ratio of 20.3 on September 8. This is at the high end of the range for the sector, suggesting the group may be overvalued. Additionally, the sector has combined price/earnings- to-growth (PEG) ratio of 2.6. A PEG ratio of 1 is usually considered to be fairly valued. However, the sector had a PEG ratio just shy of 4 in 2020, so it has shown some improvement.

Notable Calendar Items

Sep 13: August Consumer Price Index (CPI) and earnings from United Natural Foods (UNFI)

Sep 14: August Producer Price Index (PPI)

Sep 15: August U.S. Retail Sales, Philadelphia Fed Manufacturing Index and earnings from Adobe (ADBE)

Sep 16: Michigan Consumer Sentiment

Sep 19: Earnings from AutoZone (AZO) and Lennar (LEN)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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