Wednesday's Inflation Numbers Seem To Calm Investors

(Wednesday Market Open) Equity index futures bounced between positive and negative ahead of the market open as investors were still reeling from yesterday’s hotter-than-expected Consumer Price Index (CPI) just before today’s Producer Price Index (PPI) announcement.  

Potential Market Movers

The August PPI showed that wholesale inflation moved as expected in August, falling 0.1%. However, the year over year (YOY) rate was actually lower than expected at 8.7% instead of the 8.8% target. However, core inflation—which removes the more volatile oil and food prices—was hotter than expected, rising 0.4% in August instead of the forecasted 0.3%. Wholesale inflation YOY rose at 7.3% compared to the projected 7.1%.

While the PPI report was mixed, it was better than yesterday’s CPI report. It’s also the second monthly PPI report that showed some softening in inflation at the business level. Hopefully, this is signaling that inflation is topping out upstream from consumers and that lower prices will flow downstream soon.

The S&P 500 futures did move back to the positive side after the PPI report.

Another positive note for stocks is that the Cboe Market Volatility Index (VIX) is still below 28. Since the end of August, the 28 level has been resistance for the VIX and a key level for the bulls. If this level breaks, the bulls could get roasted, but for now, the level appears to be holding.

With that said, the 10-year Treasury yield (TNX) spiked up another four basis points in premarket action to 3.46% and tested its June highs. This jump could be a drag on growth stocks as investors will revalue stocks once again.

The Mortgage Bankers Association reported that the average 30-year mortgage rose above 6% for the first time since 2008. The news could put more pressure on housing stocks.

The U.S. dollar experienced a lot of volatility overnight with the U.S. Dollar Index ($DXY) giving up all of yesterday’s gains and then took back most of those gains once again. Yet, the dollar index was down 0.31% before the American markets opened.

Great Britain reported CPI and PPI numbers that were softer than expected. Consumer inflation grew 9.9% YOY but that was lower than the projected 10.2%. However, the high pace of inflation could prompt the Bank of England (BoE) to continue its aggressive approach to inflation by hiking rates. The British pound appreciated against the dollar suggesting that investors are anticipating the BoE to be aggressive.

Russia’s invasion of Ukraine has resulted in thousands of deaths and millions of refugees as well as compounding the global inflation problem. These issues could get worse on reports from Reuters that Russian President Vladimir Putin and Chinese President Xi Jinping will be meeting in Uzbekistan on Thursday to discuss several items including Ukraine and Taiwan.

Reviewing the Market Minutes

Stocks had their worst day since June 2020, after a hotter-than-expected August Consumer Price Index (CPI) report was announced. The CPI rose 0.1% month over month (MOM) instead of a decline of 0.1% forecast by analysts. Year over year (YOY), CPI grew at a pace of 8.3%, also unexpectedly higher than the 8.1% forecast.

With inflation still growing at such a fast pace, investors are expecting a more aggressive Federal Reserve at its rate meeting next week. The CME FedWatch Tool was calculating a 68% probability of a 75-basis-point hike and a 32% chance of 100 basis points. Running up to today’s CPI announcement, the probabilities of 75-point hike were actually dwindling, and investors appeared to have convinced themselves that 50 points would be a more likely decision.

The 10-year Treasury yield (TNX) jumped six basis points to 3.42% near its June high when so much uncertainty surrounded the commodity markets due to the Russia-Ukraine war. The 2-year Treasury yield rose 18 basis points to 3.75%.

Rising yields caused the U.S. Dollar Index ($DXY) to surge 1.44%. The dollar index regained its previous three days of losses and is nearing its September high.

The major indexes all plummeted with the Nasdaq ($COMP), S&P 500® index (SPX), and Dow Jones Industrial Average ($DJI) respectively closing -5.16%, -4.32%, and -3.94% on the day. Growth stocks appeared to take the biggest hit as the S&P 500 Pure Growth Index plunged 4.71%.

Not surprisingly, all market sectors were negative on the day led by technology, consumer discretionary and financial stocks. Energy stocks were down the least; however, WTI crude oil futures settled only 0.4% lower.

The PHLX Semiconductor Index (SOX) led the sector plunge, falling 6.18% on the day. However, the homebuilders and retailers came tumbling immediately afterward with the S&P Homebuilders Select Industry Index and the Dow Jones U.S. Retail Index respectively falling 5.90% and 5.80% by the close.

CHART OF THE DAY: You may remember the downtrending channel about two weeks ago. It showed the S&P 500 (SPX—candlesticks) had rallied up to resistance in August and then turned down. The recent downswing hit the middle line of the channel and bounced higher. Tuesday’s downward move appears to have created a bear flag pattern. Using this price pattern, many technical analysts would project the index to keep falling over the next couple of weeks until it nears the bottom of the channel. 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

SEEKING SHELTER: The CPI revealed that shelter costs continued to rise in August—growing 0.7%. However, the Zillow Observed Rent Index (ZORI) is showing signs that rent inflation is actually slowing. The ZORI, which tracks asking rent prices, rose 0.6% MOM in August and 12.5% YOY. However, these increases were lower than the previous months. Zillow’s (Z) chief economist Jeff Tucker expects rents to slow this winter to the pre-pandemic pace of 3% to 4% annually.

Meanwhile, Yardi Matrix, which tracks asking rents for multifamily units, recorded a $1 decline in rents in August. It was the first decrease since June of 2020.

Rent growth tends to slow down in the fall and winter months, so the CPI could start to show some improvement in shelter costs over the next couple of months.

FOOD INFLATION: The “IRI August 2022 Price Check: Tracking Retail Food and Beverage Inflation” report notes food inflation is much higher than what was reported in yesterday’s CPI numbers. The IRI report recorded an increase of 1.6% which was twice what the food at home number was for the CPI report. The report looks at food inflation at more granular level. The data analytics firm said that carbonated beverages and common fresh fruit respectively rose 5.3% MOM. However, butter/margarine/spreads had the highest growth YOY growth at 30%. Coffee was up less than 0.3% in August but is up 18.6% YOY.

Higher costs have consumers changing their spending habits—they’re purchasing fewer items. The overall retail food and beverage unit sales were down 4.5% YOY with the volume of sales decreasing 4%. IRI found that shoppers were less likely to spend on frozen dinners, cookies and coffee as well as frozen seafood, candy, snack bars, and granola.

IRI also said that people are also taking fewer strips to the store and are less likely to stock their pantries.

ONGOING CONCERN: A BofA Securities survey reveals that more than half of fund managers continue to ditch equities in favor of cash due to recession fears. A record 52% of respondents reported that they were underweighted in stocks while 62% were overweighted in cash. Participants also reported that they were shunning European stocks too, with 42% reporting they’re now underweighted. This was the largest such position on record for European stocks, according to the survey.

BofA Securities also revealed that not only are investors high on cash, they’re also long the U.S. dollar, oil and commodities, ESG assets, and growth-oriented investments. They’re also short U.S. Treasuries.  

Notable Calendar Items

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)

Sep 20: FOMC meeting starts and Building permits and Housing starts

Sep 21: Existing home sales, FOMC interest rate decision, Fed Chairman Powell’s press conference and earnings from General Mills (GIS), Lennar (LEN), H.B. Fuller (FUL), and KB Home (KBH)

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

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