Europe is OK… for now

Stocks climbed yesterday after European economic numbers showed that Russian sanctions and the Ukraine invasion has not yet materially affected performance. Crude oil prices pulled back, but they remain at high levels, as NATO allies discuss further import curbs.

Pick your poison.  Ok, this isn’t easy for me, but I will try to be quick with this. THERE IS NO EASY WAY OUT OF THIS PERFECT STORM OF INFLATION…JUST DEAL WITH IT…for now.  That was blunt, wasn’t it?

The Federal Reserve is raising rates with hopes of discouraging us from buying so much and driving prices higher. Higher rates mean that the Fed, in essence, is making it EVEN MORE COSTLY to buy things that we finance with loans or credit. Fed members believe that the key lending rate will be around 2% by the end of the year while Fed Funds futures are pointing to around 2.25%. In their public speaking since the last policy meeting, just about every FOMC member has hinted at or called for +50 basis point hikes. One member even thinks we should expect rate hikes even between meetings…which is aggressive. 

Prices of goods, aside from the Fed’s attempt to influence us, are high and it looks like there is no near-term relief on that front. Crude oil prices remain high, having grown by some +22% since Russia’s invasion of Ukraine and by +48% since the beginning of 2022! In consumer terms, those gains have led to gasoline prices rising by +18% since the invasion and +28% since the start of 2022.

What about food? At this point meat is around +14% higher than it was a year ago. Those increases are largely due to rising labor costs associated with the tight labor market. Increased transportation costs…diesel fuel, can only exacerbate the problem. On to grains, which have grown at a more moderate pace. Though it has not happened yet, we are likely to see inflation there as well, brought on by the Russo-Ukrainian war. It is true that Ukraine and Russia are together one of the largest corn and wheat exporters globally. A cutoff of supply due to conflict and sanctions will surely push prices higher, though their export destinations are predominantly Europe, the Middle East, and China, so the US may escape some of that pain. However, farmers in the US are reliant on fertilizer to nourish their crops, and Russia is the world's largest producer of fertilizer. Bet you didn’t know that (sidenote: Russia only produces around 8% of global vodka exports). With a sudden fall in fertilizer supply, prices of fertilizer have gone up significantly. Though no sanctions on fertilizer have yet been announced, the markets have adjusted. Farmers are simply going to spend more to raise grains. Grains make meals and flours which go into food, animal feed, etc. Meat and baked goods producers will, therefore, find themselves paying more for those inputs, and guess who will bear those cost increases? You and me.

Essentially, the current inflationary environment is not only demand driven, but, even more so, a supply problem. The challenge with that is that Fed rate hikes, while they will certainly cause discomfort to suppliers, will have very little impact on their cost-driven price hikes. Hopefully, the Fed will tread carefully in the months to come and realize that it is we, the consumers who are taking most of the brunt of inflation.

WHAT’S SHAKIN

CF Industries Holdings Inc (CF) shares are higher by +2.44% in the premarket. The fertilizer producer’s stock, along with those of its competitors have been climbing along with the price of fertilizer – SEE ABOVE. The company announced earnings last month and missed EPS estimates while it beat on Revenues. The stock has grown by +50.9% year to date and is due to announce its Q1 earnings in May.  Dividend yield: 1.12%.  Potential average analyst target upside: -13.6%.  WHY IS THIS NEGATIVE?  Because the stock is currently trading above the average analysts’ 12-month target price.  Though this can be interpreted as the stock’s being overpriced, it does not mean that the stock cannot continue to climb.

NIKE Inc. (NKE) shares are higher by +0.62% in the pre-market after announcing that it partnered with the family of the late Kobe Bryant to continue to produce Kobe related sportswear and shoes.  Though the stock has struggled this year, losing -20.6%, it announced earnings earlier in the week and beat EPS and Revenue estimates by +20.43% and +2.47% respectively.  Dividend yield: 0.92%.  Potential average analyst target upside: 24.8%. 

Fortinet Inc (FTNT) shares are lower by -2.09% in the premarket in response to Bank of America downgrading its rating to NEUTRAL from BUY.  BofA, additionally lowered its 12-month price target.  Year to date the stock has given up -6.59% but has returned +96% in the past 12 months.  Potential average analyst target upside: 6.6%. 

YESTERDAY’S MARKETS

Stocks climbed yesterday as the Euro Area economy has proven to be resilient to the Russia Ukraine war…so far. The S&P500 rose by +1.43%, the Dow Jones Industrial Average climbed by +1.02%, the Nasdaq Composite Index traded higher by +1.93%, the Russell 2000 Index gained +1.13%, and the S&P500 ESG Index advanced by +1.47%. Bonds slipped and 10-year Treasury Note Yields climbed by +8 basis points to 2.37%. Cryptos jumped by +5.25% and Bitcoin traded higher by +3.6%.

NXT UP

• Pending Home Sales (Feb) probably climbed by +1.0% after falling by -5.7% in the previous month. 
• University of Michigan Sentiment (March) is expected to come in at 59.7, in line with prior estimates.
• Next week we will get more housing numbers, additional regional Fed reports, Conference Board Consumer Confidence, JOLTS, GDP, PCE Deflator, and the monthly employment numbers. It will be a big week for economic releases, so check back on Monday for calendars and details.